Nine month warning: are you ready for looming climate rules?

Landlords with UK assets face a “crunch point” in April 2023 as a ban on letting buildings with poor energy ratings comes into effect. Here is what you need to know about MEES.

MEES at a glance

• What is it? Minimum Energy Efficiency Standards
• What does it say? Landlords will be banned from continuing to let commercial real estate space with an Energy Performance Certificate (EPC) rating below E
• Who does it affect? Commercial landlords with real estate assets in England and Wales
• What’s next? The ban is expected to extend to buildings with an EPC below C in 2027 and B in 2030. Some 85% of the UK’s commercial stock falls below that threshold.

How will existing laws change in April 2023?

“There’s quite a crunch point coming in April 2023,” says Edward Glass, senior associate at law firm Forsters.

As it stands, landlords are banned from granting new leases in non-domestic property with an EPC below E. However, from next year, that ban will extend to existing leases.

That means any sub-E rated office, shop, warehouse or other commercial building with an existing lease risks incurring a fine.

There are exemptions in some cases, including if necessary works would devalue a building by more than 5%. Landlords can also continue to let a space if they can show that they have undertaken relevant improvements – or if none exist – and the property still falls below required standards.

What are the penalties for non-compliance?

Penalties are twofold. First, sub-standard buildings face a penalty of 20% of their rateable value, capped at a maximum of £150,000.

Second, landlords risk being named and shamed on a public register.

Glass says: “In practice, that is what our typical landlords are most worried about: institutional landlords having reputational damage as a consequence of publication to the wider world.

“Irrespective of the fact that, commercially, there may be desperation to get a lease in place and it might be F or G rated, the prospect of a reputational hit is just one that they won’t countenance.”

As a result, Glass has seen lettings get held up because landlords will prioritise bringing their buildings up to standard.

How is MEES enforced? And is it actually enforced in practice?

Local authorities are responsible for enforcement. But, anecdotally, enforcement has been limited, Glass says.

Local authorities – many of which will not have the resources they need – are effectively asked to scope out buildings and their EPCs, determine whether the building requires an EPC, whether it is let, whether it had an EPC at the point of letting and so on.

“It’s quite resource-intensive in the manner in which it can be enforced, and so I think that explains a lot,” Glass says.

If that’s the case, why are landlords concerned?

Besides putting landlords’ reputations at stake, next year’s rules are just the start of legislation rapidly ramping up.

Under government proposals, the ban on renting commercial space will extend to buildings under an EPC C in 2027, rising to B in 2030.

While roughly 10% of commercial space is at risk of non-compliance next year, that rises to a whopping 85% by 2030.

Will the government also toughen up enforcement?

Yes. Along with tougher regulations, the government is also proposing an EPC register. This would give landlords a two-year window to submit their assets’ EPCs ahead of the 2027 and 2030 deadlines.

All landlords would have to show by 2025 that their buildings have an EPC rating, and by 2027 that rating has to be a C or above. Similarly, in 2028 they will have to once again show that they have an EPC rating and by 2030, that must be a B or above.

That should, in theory, make it easier for local authorities to enforce MEES.  However, these proposals have yet to be confirmed and are subject to changes.

What should landlords do to prepare?

Glass has four bits of advice for his clients:

1. Be portfolio ready. Don’t just think about today and tomorrow; think about the future. If you’re going to grant a long lease now, think about what that will mean for you in 2027 or 2030. By contrast, if you have a void coming up, that is the perfect opportunity to sort out the building.
2. Collaborate with tenants. Landlords and tenants are increasingly aligned in their ESG-related goals, which means there are opportunities to work together to raise EPCs. For example, a landlord might contribute to energy improvements during the lease in return for a tenant extending that lease. Leases that contain sustainability-linked clauses are also increasingly popular.
3. Don’t forget about tech. Alongside improvements such as insulation and solar panels, think about the hardware and software that can help improve the sustainability of the building.
4. Take advantage of investment opportunities. Not everyone will have the capital to improve their buildings enough between now and 2030. But that can be an opportunity for savvier investors to swoop in, buy and retrofit those buildings themselves.