Minimum Energy Efficiency Standards: what all office occupiers should know
Since 1 April 2018, landlords of most commercial premises have been required to meet minimum energy efficiency standards (“MEES”) before entering into any new tenancies. These rules will be expanded to cover most existing commercial tenancies from 1 April 2023, so that landlords must not continue to let a property after that date, unless the minimum efficiency standards are met. Although any works carried out by landlords to comply with MEES are likely to benefit office occupiers in the long run, in the form of lower energy bills and a reduced carbon footprint, these occupiers need to remain alert to the more immediate potential challenges.
When do the MEES regulations apply?
Prior to considering what impact MEES may have on their premises, office occupiers should first establish whether the MEES regulations apply to their premises at all.
The MEES regulations apply to commercial premises that are considered “sub-standard”; a premises will be sub-standard if it has a valid Energy Performance Certificate (“EPC”) rating below an E – i.e. an F or G. However, the government has recently consulted on raising the minimum EPC rating to B or C (the former being the government’s preferred choice) by 1 April 2030. That rise could be incremental, meaning that the minimum rating may rise from an E much sooner than 2030. Office occupiers should therefore be careful not to dismiss the significance of the MEES regulations, even if at the date of their lease, the rating achieved by the premises is at least an E.
The MEES regulations will only apply to premises that are required to have an EPC. The rules around which premises are exempt from the requirement to obtain an EPC are complex, but this will ultimately be a judgment for the landlord to make with the benefit of expert advice. It is suffice to say that most office premises will require an EPC and will therefore potentially be subject to the MEES regulations.
In some circumstances, a landlord may be able to claim an exemption from the MEES regulations. Whilst exemption claims are currently relatively uncommon, office occupiers should think carefully about taking any lease where an exemption claim has been made. Office occupiers will generally wish to avoid finding themselves locked into leases of inefficient buildings which are expensive to run, particularly if the market is moving towards greater energy efficiency.
What impact will the MEES regulations have on office occupiers?
The MEES regulations present challenges to both those looking to take a new lease of office space and those whose leases have already been granted.
Where an office occupier is looking to take a lease of new premises with an EPC rating below an E, it is likely that the landlord will need to carry out energy improvement works before the lease is granted. The exact scale of the works required will depend on the premises in question, but it is possible that the works will be costly and take a significant period of time to complete. Identifying the EPC rating of office premises early on is therefore crucial, as this could save significant time and cost.
In circumstances where a lease has already been granted but the EPC rating of the premises is below an ‘E’ (because, for example, the lease was entered into prior to 1 April 2018), energy improvement works may be required if the term of the lease extends beyond 1 April 2023. All such works would need to be carried out and completed before 1 April 2023.
Even if the EPC rating of the premises is an E or above, energy improvement works may still become necessary as and when the government starts to increase the minimum EPC rating from an E.
Any works to improve the energy efficiency of a building during the lease term could potentially cause significant disruption to an occupier’s use and enjoyment of the premises. It is therefore important that occupiers maintain a constant dialogue with their landlords to understand the landlord’s intended works programme.
Crucially, both occupiers and their landlords must remember that the contractual relationship between the parties continues to be governed by the lease and the landlord must comply with its landlord covenants in carrying out any energy improvement works. Where such works are proposed therefore, occupiers may wish to take expert legal advice to establish the landlord’s rights and obligations under the terms of the lease. This will be particularly important where an occupier is concerned, for example, by the potential disruption from the works or potential reduction in useable floor space caused by the works. If the rights reserved to the landlord are insufficient to carry out the required works, could there be scope to agree some concession with your landlord in exchange for allowing the works to be done, or could you ask your landlord to carry out additional works for your benefit at the same time?
Energy improvement work drafting in leases
Given the potentially significant cost of energy improvement works, many landlords are seeking to introduce bespoke drafting into their leases dealing with this issue. Whilst such drafting can be helpful in clarifying the party's rights and responsibilities in respect of energy improvement works, it is extremely important that office occupiers take expert legal advice on all such provisions. Indeed most office occupiers will be keen to ensure that they do not inadvertently end up picking up the capital cost of the energy improvement works through such drafting.
The way ahead
Although the benefits of more efficient buildings are obvious, office occupiers need to consider carefully what energy improvement works might be necessary during the lease term and how these works could impact their use and enjoyment of the premises. These occupiers must also ensure that their leases are watertight, so that they do not find themselves unexpectedly footing the bill for energy improvement works. It is clear that the government’s drive to increase the energy efficiency of commercial premises over the next decade will present significant challenges for landlords and their occupiers alike. Effective and timely legal advice can help successfully overcome the obstacles along the way.