Are the MEES changes for commercial property in force yet?

Following the UK government's announcement to scrap the EPC requirements for residential properties, the MEES debate for commercial property is once again back in the spotlight. While the property sector awaits further clarity on the regulatory targets, we've taken a look back at what is required from commercial property to comply with the upcoming 2027 and 2030 MEES regulations.

"Are the MEES changes for commercial property in force yet?" - A question I am frequently asked and following PM Rishi Sunak's announcement on 20 September rowing back on various green commitments, the MEES debate will again be in the spot light. The Government will no longer force residential landlords and homeowners to upgrade the energy efficiency of homes. No mention of commercial buildings.

To answer the question - no the changes are not yet in force. The property sector is eagerly awaiting further clarity on the regulatory targets.

But the delay in publishing a response to the March 2021 consultation and bringing the regulations into force is driving uncertainty, and a delay in action puts the 2027 and 2030 dates at risk by setting unrealistic targets.

Although the likely framework is known clarity is needed on whether these timeframes will remain as stated to date and also the detail on exemptions and enforcement.

It could also be that this will be kicked into the long grass and looked at post general election.

Let's remind ourselves of the current challenge for commercial property. It is estimated that close to 90% of current office space has an EPC rating of 'C' or below and approximately 1bn sq ft of space in the UK below a 'B' rating. We understand that around 60% of UK warehouse space will not achieve a 'B' rating come 2030 when that requirement applies under existing policy. These stats or similar have been quoted now for over four years since the MEES debate started.

The problem is known and has been known for many years, but limited action has been taken. There is evidence that EPC ratings are improving but there is a long way to go. React News highlighted analysis by Search Acumen revealing that based on the current rate of EPC improvements it will take 13 years, or 2036, for all commercial rental properties below a B to hit the 2030 MEES standards.

I first wrote an article on 'Prioritising sustainability in the Real Estate Sector' in November 2021. Re-reading that two years on, the questions that were needed and still need to be asked remain the same – what rating do I have, what can I actually do in practice to improve it, can I physically achieve that, how much will it cost and how will it be funded? All that may have a major impact on valuation and knock on impacts on funding and lettability.

The point being that these dates are relevant now for leases already granted or leases to be granted for terms that expire after these dates. A lease already granted or the grant of a lease now for a term that runs for more than four years of EPC D-G premises or a term more than seven years of EPC C-G premises is a potential problem that needs to be thought about now.

But uncertainty will always impact on action and specifically financial investment, which is so critical when the real estate sector is estimated to be responsible for around 40% of the UK's greenhouse gas emissions.

The clarity needed on exemptions and enforcement is also raising concerns with Local Authorities where this responsibility sits. Outstanding questions around how Local Authorities will monitor compliance - how to marry up an EPC against what buildings are let – enforcement and of course the multitude of exemption applications that will flood in the door. Do Local Authorities have the resources to manage the implementation of these changes?

We hear that in the market some proactive property owners are instructing a full review of their portfolios to look at EPC ratings and the letting position for length of term and expiries in order to get an understanding of what issues will be faced come 2027 and 2030. But more needs to be done.

So whether as landlord or as a funder, the first point is to check the EPC rating of the premises:

If EPC rated A/B - not much further action should be needed (noting the EPC has a 10 year life and you cannot assume on renewal that you will get the same rating). But note since 1 April 2023 a lease in place for a building with an EPC rated F or G will be a breach of the regulations.

But also consider (assuming the consulted regulations become law):

1. EPC rated D-G – a lease in place in 2027 will be a breach; and
2. EPC rated C-G – a lease in place in 2030 will be a breach.

'Breach' is a breach of statute. This has implications for a breach of headlease covenants where it is a leasehold property but also financial covenants in finance documents where finance is in place.

Of course this also may have reputational issues in terms of leasing premises that do not meet minimum legal requirements.

Plus the landlord as property owner is liable for a fine currently proposed as:

• Breach of less than three months: the penalty will be 10 per cent of the rateable value of the lettable unit, subject to a minimum penalty of £5,000 and a maximum penalty of £50,000.
• Breach of more than three months: the penalty will be 20 per cent of the rateable value of the lettable unit, subject to a minimum penalty of £10,000 and a maximum penalty of £150,000.

That fine is per lease. So in a multi let building this could add up.

It should be noted that this does not impact on the validity of the lease itself where there is a breach.

So the repeat message is:

• What rating does the building have and when is the renewal date
• What improvements can be made in practice to achieve the required rating and the likely cost;
• How can you 'improve' the EPC rating during the term to avoid breach when it is occupied;
• Does the lease cater for the ability to make those improvements;
• Who will pay the cost;
• If improving the rating as required is not going to be possible, do you have a clear understanding of the likely exemption application that will be made and when does that need to be submitted

Obtaining an exemption is not a solution. This just kicks the can down the road. The exemptions last for five years then the owner must try again to improve the rating. So it is a temporary fix. The point being you still own a building that does not meet the required minimum energy performance standards.

Either way, the clock is ticking and further action is needed to address the practicalities of complying with MEES by 2027 and 2030, especially as the property sector will require investment to upgrade commercial buildings in the UK, particularly if it is to play its part in achieving net zero.