The new legal standard for energy efficiency which applies to both residential and commercial buildings that are let was introduced in March 2015 and poses both threats and opportunities for lenders, landlords, freehold investors and developers.
This article will focus on its impact on the commercial rental industry and the effect on lenders, landlords, freehold investors and developers working within.
What is the Minimum Energy Efficiency Standard (MEES)?
The Minimum Energy Efficiency Standard (MEES) was introduced in 2015 to reduce the number of properties that are let which are not fit for purpose. This change means that properties must reach a minimum energy efficiency rating of E if they are to be let.
Read more on energy efficiency ratings here.
Why is the Government introducing the Minimum Energy Efficiency Standard (MEES)?
The Government are committed to improving working and living conditions wherever possible. MEES is another method to increase the likelihood of the UK meeting its carbon reduction targets for 2020 and 2050. It is estimated that 18% of commercial properties nationwide are graded F or G in their Energy Performance Certificates (EPCs), which is the lowest grade possible. This is a worrying statistic and the Government has taken a proactive approach to reduce this.
What type of buildings and tenancies does the Minimum Energy Efficiency Standard (MEES) apply to?
Working out whether a building or tenancy needs to comply with the Minimum Energy Efficiency Standard (MEES) can be a complex task. Please contact us for further assistance on this if you are unsure. The general consensus is that the Standard will apply to nearly all buildings and nearly all tenancies, but the following are excluded:
- buildings that do not require an Energy Performance Certificate (EPC), such as non-residential agricultural buildings with minimal energy demand, temporary properties, holiday lets, workshops, industrial sites and certain listed buildings
- buildings where the EPC is over 10 years old or where there is no EPC
- tenancies of less than six months with no right of renewal
- tenancies of over 99 years
There are other things to consider when figuring out whether the Minimum Energy Efficiency Standard (MEES) applies to the property.
What happens if I don’t comply with the Minimum Energy Efficiency Standard (MEES) and proceed to let my property?
You will be penalised if you fail to comply with the Minimum Energy Efficiency Standard (MEES), which will be rateable to the value of the property.
If you rent out a property for less than three months and it is not MEES compliant, you can face a penalty anywhere from a minimum of £5,000 to a maximum of £50,000. If the rental period has been over three months, this rises to 20% of the rateable value and will be a minimum of £10,000, up to a maximum of £150,000.
However, the good news is that this comes into effect from 1 April 2018, so there is plenty of time to ensure your properties are at least grade E on their Energy Performance Certificates.
What does the landlord need to do to prepare for the Minimum Energy Efficiency Standard (MEES)?
Unfortunately, landlords are going to be the most affected by the implementation of the Minimum Energy Efficiency Standard (MEES).
If any property in a landlord’s portfolio has an Energy Performance Certificate of grade F or below, the landlord will need to invest in making the property more energy efficient before April 2018.
Also, the landlord may face issues with tenants for gaining access or increasing service charges to cover the expense of the improvements.
What does the Minimum Energy Efficiency Standard (MEES) mean for developers and freehold investors?
If you are a freehold investor or developer who has properties that are being sublet by landlords, you may face issues with getting your properties compliant with the Minimum Energy Efficiency Standard (MEES). The best way for freehold investors and developers to move forward and prepare is to audit their portfolio and identify any properties that won’t be compliant with MEES.
What impact does the Minimum Energy Efficiency Standard (MEES) have on lenders?
If the property is substandard and doesn’t comply with the Minimum Energy Efficiency Standard (MEES), the value of the property might be significantly decreased if the property is unable to be let. In addition, if the lender has already given money against a property, it may also increase the risk of inability to pay, as the borrower might be reliant on the rental income to achieve their mortgage repayments.