Clearing up MEES misconceptions

After a lengthy lead-in period, the main provisions of the Minimum Energy Efficiency Standard (MEES) regulations take effect on 1 April 2018. Despite their length and the extensive guidance on MEES from the Department for Business, Energy & Industrial Strategy, there remain plenty of questions about MEES that cannot be answered definitively. There are also a number of MEES myths in circulation. This article addresses some of those from the perspective of a letting of a commercial property with an EPC rating below E (a “sub‑standard non-domestic PR property” in MEES terminology).  What are the consequences of granting a lease of a sub‑standard building? The first myths to debunk are that the lease will be invalid and the landlord can be sent to jail. Neither is true. The MEES regulations expressly say that the lease is not affected in any way. It can be enforced according to its terms. But granting the lease in breach of the MEES regulations puts the landlord at risk of a civil penalty – which can be as high as £150,000 – together with adverse publicity. There is no sanction for the tenant accepting such a lease, although it may find itself in difficulty if it wishes to sublet, as it will then (as landlord) itself have to comply with MEES. Does MEES apply to intra‑group lettings? There is no express exemption in the MEES regulations for intra-group lettings. However, MEES applies only to properties with a current EPC, and the EPC guidance states that an EPC may not be needed for a not-for-value transaction. So in the right circumstances, an intra-group letting may not trigger MEES. Can the parties avoid MEES by operating under an agreement for lease? MEES applies only to lettings. The guidance states (in paragraph 1) that “… ‘agreement for lease’ arrangements are unlikely to be required to meet the minimum standard”.  So if the parties were content to rest on an agreement for lease, this would in theory be a way for a landlord to permit occupation of a sub-standard property without MEES applying.  However, long-term reliance on an agreement for lease has disadvantages for both parties. The lack of any completed lease may adversely affect the landlord’s investment value and the tenant will not have a legal interest in the property, making the lease difficult to assign in the future. We think this option is less attractive in practice than it sounds on paper. Are licences (as opposed to leases) covered by the MEES regulations? A genuine licence – a personal agreement between the landowner and the occupier – is not within MEES. However, the name given to a document is not conclusive. If the occupier has exclusive occupation (either for a fixed period or on a periodic basis, such as monthly) that is a letting even if the parties call it a licence. Can the landlord pass the burden of MEES works on to the tenant? There is a myth that MEES compels landlords to carry out any required works themselves. The MEES regulations do not prevent the parties agreeing that the tenant will carry out the works, so long as the property ends up with an E rating before the lease is granted. They can also agree (expressly or impliedly) in the lease that the landlord can pass the costs of MEES works to the tenant (either directly or within the service charge). However it is unlikely that the landlord can require the tenant to carry out works merely by relying on the tenant’s covenant to comply with statute, since MEES does not actually require a landlord to carry out any specific works. How does MEES apply where a tenant is to carry out fitting-out works? This depends on whether there is an existing EPC. If the property has an EPC rated E or above, MEES is unlikely to be relevant. A tenant’s fitting out works are rarely so extensive as to require a new EPC. Regulation 7A of the EPC regulations would require this only where the modification results in a greater or lesser number of parts designed or altered for separate use than it previously had, where the modification includes the provision or extension of any of the fixed services for heating, hot water, air conditioning or mechanical ventilation. Where there is no existing EPC and the premises comprise a shell, it is likely that an EPC carried out before the tenant’s works are completed would be F or G, because the EPC software uses default values for premises that are not yet fitted-out. To obtain an EPC with a rating of at least E, it is necessary to wait until the fit-out is complete. The tenant can be granted access as licensee under the agreement for lease to carry out the works. It is important to agree what should happen if the EPC obtained after completion of the tenant’s works is sub-standard, as the landlord would be in breach if the lease is granted and the landlord has not registered an exemption. What evidence is required to register an exemption in the exemptions register? To register an exemption, landlords will need to set up a unique user account to access the exemptions register. None of the writers have any experience yet of how easy this is to do, or how simple the register will be to use. The Schedule to the MEES regulations (summarised in chapter 4 of the guidance) sets out the requirements for registering exemptions. In all cases, the landlord must provide the address of the property, indicate the exemption claimed and lodge a copy of the property’s EPC. Additional information is needed depending on the exemption being claimed. For example, if the improvement works do not meet the “seven-year payback” rule, the landlord must lodge copies of no fewer than three quotes for the cost of purchasing and installing the relevant measure from qualified installers together with the landlord’s confirmation that these do not meet the seven-year payback test, with copies of supporting calculations. Pic credit: Cultura/REX/Shutterstock Peter Williams is a real estate professional support lawyer at Shoosmiths, Sue Highmore is a writer and trainer and Alison Murrin is a real estate professional support lawyer at Ashurst