How do the Minimum Energy Efficiency Standards affect trusts?

For those trusts that own investment property (whether the property is held directly by the trust or trustees or through a special purpose vehicle), it is essential to consider whether the trust’s buildings comply with the Minimum Energy Efficiency Standards (MEES) where applicable.

What is MEES?

MEES broadly require any landlords of commercial premises to hold an Energy Performance Certificate (EPC) with a rating of E or above, unless an exemption applies and has been registered on the Private Rented Sector Exemptions Register (Register).

Prior to 1 April 2023, the requirement only applied to new leases of commercial premises. However, from 1 April 2023, it also became unlawful for a landlord to continue to let “sub-standard” commercial premises (unless the premises are excluded from the MEES regime or the landlord has registered a valid exemption).

Therefore, generally MEES will apply to any investment properties held by trusts.

Are there any exclusions?

The regime applies to non-domestic private rented property situated in England and Wales, which is let under a qualifying tenancy and is required to have an EPC.

What is a qualifying tenancy? A “qualifying tenancy” does not include certain tenancies with a term of six months or less, or 99 years or more. The legislation does not define a “tenancy” itself, but it seems unlikely that an agreement for lease or licence will be caught.

What buildings aren’t required to have an EPC? Certain buildings are not required to have an EPC, such as buildings with no air conditioning or heating, as well as religious, temporary or very small buildings.

Are there any exemptions?

A valid exemption must be registered on the Register, and will usually last five years but will not be transferable (ie a new owner needs to register a new exemption). The key circumstances in which an exemption may apply are:

1. Economic exemption

If the cost of carrying out the relevant energy efficiency improvements will not be recovered within seven years (the seven-year payback test).

2.Improvements exemption

If the relevant energy efficiency improvements have been carried out, but the premises still remain rated at below E.

3. Consent exemption

If the trust does not have a right of entry under the lease and its tenant does not consent to the trust carrying out the energy efficiency improvements. The trust does not have an automatic statutory right to carry out any necessary works.

4. Devaluation exemption

If an independent surveyor’s report states that the relevant energy efficiency improvements would reduce the market value of the premises (or the building of which they are part) by more than 5 per cent.

5. New buyer exemption

If the trust has bought a sub-standard property which is subject to tenancies, a six-month temporary exemption may apply.

Who is responsible for complying with MEES?

The statutory obligation to comply with MEES is imposed on the property owner, rather than on its tenant.

Although the trust beneficiaries may be reluctant to incur capital expenditure on making energy efficiency improvements, the works may be necessary in the longer term to improve the marketability of a property and secure future income (as more energy efficient buildings will attract higher rents and better tenants) as well as being legally required.

Can the tenant be required to carry out or pay for energy efficiency improvements? In some circumstances, a tenant may take on responsibility for complying with MEES under the terms of its lease. However, as a general rule, it is unlikely that the general statutory compliance clauses in a market standard lease will be framed widely enough to shift the obligation onto the tenant (unless there are specific commercially negotiated provisions dealing with this). Likewise, it is unlikely that any service charge recovery provisions will catch the cost of energy efficiency improvements.

Nevertheless, the tenant will have an interest in the energy performance of its premises, as this will affect the future operational costs of its premises and the marketability of its premises (as well as any proposed subletting of the premises being caught by the MEES restrictions). Even without specific drafting in the lease, in most circumstances, the tenant should be willing to cooperate with the trust to permit any necessary works being carried out. In some circumstances, the tenant may even be prepared to contribute to the cost of any required or recommended works.

On any new leases, trusts should consider what obligations to impose on their tenants in relation to energy performance and compliance with the MEES regime. Generally, it is now market standard to expect a lease to impose an obligation on the tenant not to do anything (eg tenant alterations) which will adversely affect the energy performance rating of the premises and not to commission an EPC without the landlord’s consent.

What are the consequences of breaching the MEES requirements?

Breaching MEES will not invalidate a lease of the commercial premises. However, trusts which own any “sub-standard” properties risk a hefty fine as well as being “named and shamed” on the Register.

Fines: The local authority can serve a penalty notice imposing a civil penalty for breach:

• If the breach has been ongoing for less than three months, the fine will not exceed the greater of £5,000 and 10 per cent of rateable value (up to a cap of £50,000).
• If the breach has continued for three months or longer, the fine will not exceed the greater of £10,000 and 20 per cent of rateable value (up to a cap of £150,000).
  
  

The financial consequences can therefore be severe; a trust which owns a multi let “sub-standard” building could potentially be fined £150,000 per letting.

Reputational issues: The name of the defaulting landlord (provided they are not an individual) and the address of the property, details of the breach and the financial penalty will be published on the public Register. A trust will therefore be concerned about the possibility of adverse publicity and reputational damage.

How likely is enforcement action?

While there is the natural commercial driver for property owners to improve energy efficiency for long term energy cost savings and there is a growing focus on ESG, realistically that will not be sufficient to prompt the sector to comply: the Government needs some more “stick”.

There has been a notable lack of enforcement action so far: no fines have been issued by local authorities and there is no evidence from the Register that any penalty notices have even been served. The lack of enforcement action is not surprising, since local authorities are sorely overstretched and it is not immediately apparent whether a property owner has breached MEES, ascertaining whether there is a breach will require active and detailed investigation.

Nevertheless, enforcement action can be expected to commence in the forthcoming months, otherwise what is the point of the legislation?

Local authorities are permitted to keep civil penalties. Therefore, while local authorities will have to finance the initial outlay in enforcing MEES compliance, enforcement will then become a self-funding process. To prioritise enforcement, there may also be additional funding from the Government, more training for local authorities and encouragement / incentivisation for tenants to report breaches.

We are likely to see local authorities pursuing the “safe bets” initially.

Will these Minimum Energy Efficiency Standards change?

Requiring property owners to improve the energy efficiency of their buildings is fundamental to advancing Net Zero: the UK Green Building Council estimates that 25 per cent of the UK’s total greenhouse gas emissions are attributable to the built environment.

It is highly likely that the minimum energy efficiency standard for commercial premises will be raised in the near future, if the Government remains committed to the Net Zero target in 2050. A government consultation in 2021 proposed a minimum rating of C or above by 2027, and B or above by 2030.

It is also likely that owner-occupied commercial property will face a similar trajectory.

What should trusts be doing now?

Any trusts which own investment property (whether directly or through trustees or a special purpose vehicle) should:

• Review their property portfolios to check EPC ratings (and when these expire) and to identify any sub-standard properties,
• Where applicable, seek advice as to whether any exemptions apply,
• Where energy efficiency improvements are necessary, seek advice as to who should carry out and pay for the works (and, where applicable, start liaising with the tenant),
• Seek advice on provisions to be incorporated in any new lettings regarding energy performance and the MEES requirements, and
• Check the arrangements for the service of any notices addressed to the trust, to ensure that any future compliance or penalty notices are received promptly by the trust (particularly if the address for service is in an offshore jurisdiction).
  
  

Although compliance with MEES does not affect owner occupied property at present, energy efficiency will still affect the performance and marketability of a property so it would be wise for trusts to assess the energy performance of any property they occupy as well.

This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.

© Farrer & Co LLP, June 2023