Energy performance and MEES - are you still compliant?

Energy efficiency standards for commercial property have been steadily raised over recent years. Under the MEES regulations, which came into effect on 1 April 2018, landlords have been unable to let or re-let commercial property that has an EPC rating lower than “E” (unless an exemption applies and has been validly registered). At the time, this was a major shift (and you can read our previous blog on this topic here New EPC regulations: are you ready for 1 April 2023?), but this was only the beginning.

The position hardened further from 1 April 2023, when EPC requirements were enhanced further. Landlords were unable to continue to let commercial property (i.e., allow occupation under an existing lease) that had an EPC rating lower than “E” without a legitimate reason. Thus, capturing all existing commercial leases, not just new lettings or renewals.

Following earlier calls for stronger standards, the government proposed in the March 2021 BEIS consultation (now the Department for Energy Security and Net Zero, DESNZ) that by 1 April 2027, commercial landlords will need to ensure rented buildings have an EPC rating of at least “C”, with a further proposed requirement for a “B” rating by 2030. These requirements are not yet law, but landlords should plan for them now. The consultation also considered other changes to the EPC system, including potential new metrics (like fabric performance) and improved data quality to support higher standards. The tighter standards are part of the UK’s broader strategy to achieve net zero emissions by 2050.

Whilst the government has given a relatively long lead time for compliance, the reality is that time is running out. Landlords should be focussing their energy on this now, as failure to address energy efficiency concerns could mean paying a steep price in the future.

For clarity, this is not to be confused with the domestic MEES regulations, which affect landlords and tenants of domestic private-rented properties.

Non-compliance with MEES and EPC requirements can create financial risks for Landlords that could be significant. Landlords with properties that fall short of the required energy efficiency standards may find themselves with:

1. Fines and penalties: Local authorities can impose penalties for non-compliance of up to 20% of the rateable value of the property, capped at £150,000 per breach. While this may seem like a worst-case scenario, even smaller fines can add up quickly, particularly for landlords with multiple properties in their portfolio.
2. Unable to lease properties: Under MEES, any commercial property with an EPC rating of “F” or “G” is classed as “sub-standard” and cannot be let unless an exemption applies. This is particularly problematic for landlords of older buildings, or those who have not made significant investments in energy upgrades.
3. Decreased property value: Energy efficiency is a key factor for tenants when choosing their commercial space. As awareness of sustainability grows, businesses are increasingly prioritising energy-efficient buildings. If your property doesn't meet the new standards, it could have a reduced market value. This can also impact your ability to secure financing for future acquisitions or development projects.
4. Increased operating costs: Non-compliant properties may also face higher operating costs as a result of inefficiencies in heating, cooling, and lighting systems. These added expenses could further reduce your profitability, especially if you are forced to make costly repairs or upgrades at short notice.

Beyond the financial impact, MEES breaches can carry reputational risks, too. Breaches of the MEES regulations could involve non-compliant landlords’ names being placed on a public register by local authorities (“name and shame” register), which could damage reputation and tenant relationships, as well as relationships with investors and other stakeholders. For businesses that are increasingly expected to demonstrate credible ESG credentials, it’s risk exposure that should not be underestimated.

The good news is that there’s still time to act. It's not too late for landlords to take proactive steps and safeguard their properties (and portfolios) from the risks of non-compliance with a deliberate and informed approach. Below is an essential actions checklist for landlords to consider:

1. Review existing EPCs: Start by reviewing the EPC ratings for all of your commercial properties. If you have buildings with an EPC rating of “F” or “G”, you'll need to act swiftly to bring them up to at least an “E” rating. Begin planning for the proposed requirement to achieve a “C” rating by 2027 and a “B” rating by 2030. Whilst a formal response to the 2021 consultation has not yet been published, the recommendation is not to leave it until it’s too late.
2. Energy efficiency audits: Engage an expert to conduct a thorough energy efficiency audit of your properties. The findings will identify areas where improvements are most needed and help you prioritise the most cost-effective upgrades. Common improvements include upgrading insulation, replacing inefficient boilers, and investing in more energy-efficient lighting and HVAC systems.
3. Understand available exemptions: If your property cannot be brought up to the required standard due to structural limitations or financial constraints, you may be eligible for certain exemptions. However, exemptions are very limited and are not automatic. Any landlord seeking to rely on an exemption must register it on the PRS Exemptions Register before the property is let. Exemptions are only valid for 5 years, are personal, and cannot be transferred to an incoming landlord on the sale of the property.
4. Budget for future upgrades: With April 2027 (and 2030 following that) looming, start setting aside budget now for any energy efficiency improvements that will be required. The earlier you plan for these upgrades, the more time you’ll have to spread out the cost. In addition, considering the long-term benefits of energy efficiency, these investments may eventually pay off in terms of lower operating costs, tax incentives, and more attractive rental rates.
5. Stay informed about legislation: As mentioned, the government is continually refining energy efficiency regulations. Make sure you stay up to date with any new laws or amendments to existing regulations. Given the complexity and evolving nature of MEES and EPC requirements, seeking specialist legal and technical advice is strongly recommended.

Compliance with EPC and MEES standards is now a core commercial issue for landlords and for purchasers of investment property. It’s a fundamental requirement that can directly affect your business and reputation. Understanding where your assets sit today, and where regulation is heading, is essential to avoid the risks associated with non-compliance and to protect long-term value.

Are you ready for the tightening of EPC requirements?

If you’re unsure about your property’s compliance or would like to discuss any of the points raised in this blog, please contact our Real Estate team.