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Energy efficiency for business premises

July 2016

The Minimum Energy Efficiency Standards (MEES) may not be something you have given much thought to as a tenant since they will essentially be a landlord’s problem. But if you occupy premises as a tenant, then there could be an impact on your organisation’s current lease or on any new lease you enter into if MEES are not met. Also, if you underlet then you would be a landlord in those circumstances in any event and so bound by the regulations.

The MEES Regulations 2015 introduce a key measure that:

    Requires a landlord to ensure that their non-domestic PR property meets MEES (subject to certain exemptions), failing which a landlord may not:

    grant a new tenancy, extend or renew an existing tenancy of a non-domestic PR property on or after 1 April 2018;
    continue to let a non-domestic PR property on or after 1 April 2023.

The MEES Regulations 2015 do not impose a positive obligation on landlords to carry out improvement works to PR properties. Nothing has to be done. If they choose not to do so then it is only the restrictions which will apply. But as these deadlines are approaching it would be sensible to take a pro-active approach and assess any likely consequences for you now.
What property is affected?

A non-domestic PR property for the purposes of Part 3 of the MEES Regulations 2015 is defined as:

    Let under a tenancy.
    Not a dwelling.
    In England and Wales.

However, a property is not a non-domestic PR property for the purposes of Part 3 of the MEES Regulations 2015 if;

    It is not required to have an Energy Performance Certificate (EPC); or
    It is let on a tenancy granted for a term not exceeding six months, unless:

(i) the tenancy agreement provides for renewing the term beyond six months; or

(ii) when the tenancy is granted, the tenant has been in occupation in excess of 12 months; or

      3. It is let on a tenancy granted for a term of 99 years or more.

A non-domestic PR property is "sub-standard" where the valid EPC relating to it is below Band E. It is widely thought that this threshold will increase at a later date so many landlords are considering "future-proofing" improvements well beyond Band E to protect their investment value.
Is my lease going to be invalid?

The validity or enforceability of the lease or any provision of a tenancy is not affected by a landlord letting, or continuing to let, a non-domestic PR property in breach of the MEES requirement. So, for example, a landlord cannot terminate the tenancy or require the tenant to vacate because the landlord has failed to achieve the MEES requirement. However, the landlord will be in breach of regulation 23 or regulation 27 and liable to enforcement action which amount to financial penalties and "name and shame" measures.
What should I look out for?

Landlords may seek to enhance their rights, restrict tenants rights and pass the responsibilities onto the tenant when negotiating new leases.

They may also require access to the premises under existing leases to carry out works.
How can I protect and improve my position?

If your current lease expires after the 2023 deadline (or the landlord is seeking access even though your lease expires before the 2023 deadline), you should consider what rights the landlord has to enter and carry out improvement works and at whose cost these works will be carried out. How are the repairing covenants and statutory compliance covenants drafted, what does the service charge regime include and could you as tenant be responsible for costs?

If your bargaining position is strong, can you use this to leverage improved terms in your lease (as well as improved energy efficiency)?

Should you consider exercising a break clause or relocating when your lease is due for renewal?

If you intend to underlet after the 2018 deadline, is there a valid EPC at Band E or above which can be relied upon? Can you rely on any of the exemptions? If not, can improvement works be carried out by you under the lease? Or will the landlord collaborate with you to effect these works?

On expiry of the lease, can a need for the landlord to carry out redevelopment or refurbishment to comply with MEES be argued to limit or remove dilapidations liability on you as tenant? Will any alterations you carried out to improve energy efficiency be retained by the landlord thus exempting you from reinstatement obligations?

In negotiating a new lease, can you agree concessions with the landlord in return for carrying out necessary works? This could give you the building which better suits your needs at neutral cost.

Obviously it will be important to ensure that drafting of the lease of sub-standard premises covers issues such as obtaining EPC’s, carrying out alterations, the costs of MEES works, underletting, rent review and service charges in a manner which is acceptable to you. All these issues are best dealt with initially at heads of terms stage to avoid delays in the lease negotiation process.

It remains to be seen what approaches landlord and tenants will most commonly take in the market. This is a complex area of regulation and so the overriding advice we would offer is to consider how you will be affected early in the process and review your position regularly.

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