A brief recap of the current position under the mees regulations

The Energy Efficiency Regulations 2015 (“MEES Regulations”) restrict what landlords may do with their commercial properties. In particular:

• Since 1 April 2018 landlords must not grant new leases of any of their commercial properties that are classified as “sub-standard” under the MEES Regulations; and
• Since 1 April 2023 landlords must not continue to let any sub-standard commercial properties unless they benefit from an exemption which has been registered on the PRS Exemptions Register.

A “sub-standard commercial property” is a property with an EPC rating below the required minimum, which is currently “E”.

Following a consultation in March 2021 the Government put forward proposals to raise the minimum EPC rating to C in 2027 and further still to B in 2030. However, these changes have not yet been implemented and the Government, has intimated that these timelines will be revised “to allow sufficient lead in time for landlords and the supply chain.”

How does this affect your commercial leases?

Landlords are therefore coming under increasing pressure to improve and protect the energy efficiency of their commercial properties - so they can secure the best possible EPC rating and avoid the risk of letting restrictions. This has led many of Land Law’s clients to ask us how this might affect the terms of their commercial leases. We consider some questions and key lease provisions that may be relevant to energy efficiency below:

Do the standard tenant covenants to repair and to comply with statute enable a landlord to oblige a tenant to carry out energy efficiency improvements at the tenant’s cost?

• A typically drafted repair covenant does not assist a landlord in this regard. In the absence of case law directing otherwise it would be difficult to argue that a tenant covenant to “repair” requires improvements so as to enable a specific EPC rating to be achieved.
• This is also not caught by the statutory compliance tenant’s covenant found in most commercial leases. The MEES Regulations do not positively oblige property owners or occupiers to carry out energy efficiency improvements but rather have a negative effect in restricting a landlord from letting sub-standard commercial property.

What lease provisions have become market standard in light of the MEES Regulations?

• It has become market standard to restrict a tenant’s ability to carry out alterations if to do so would have an adverse effect on the EPC rating of the property.
• Controls on the commissioning of an EPC by a tenant are also generally seen as acceptable.
• The option for the landlord to notify a tenant to leave alterations in situ on yielding up if to remove them would reduce the energy efficiency of the premises is becoming more common.

What are the more contentious provisions being negotiated in leases in light of the MEES Regulations?

• Landlords may want their tenants to yield up the premises at the end of the term with an EPC rating which is above the sub-standard level. A requirement to do this may however be considered by some tenants as onerous, particularly given the lack of certainty about what EPC ratings will be considered “sub-standard” in the future.
• An obligation to give the premises back with the same rating that the property had when it was let is generally considered more reasonable - as this does not require betterment. Provided that the existing rating system is maintained this will ensure the landlord can let again without worry – but if the sub-standard classification increases, the original rating may be insufficient, leaving landlords with a problem.
• A right of access for a landlord to carry out energy efficiency improvements to demised premises at the landlord’s cost may sound more palatable to tenants but this could be intrusive and should be subject to reasonable controls. Recommended controls from a tenant’s perspective would be:
  • approval of the works (such approval not to be unreasonably withheld or delayed),
  • a workable notice period coupled with an obligation to minimise impact on the tenant’s business operations so far as reasonably possible; and
  • a landlord obligation to use reasonable endeavours not to cause damage and to make good any damage caused.
  A landlord should bear in mind that clauses giving them rights to make energy efficiency improvement also remove the availability of one of the exemptions to the MEES restrictions - namely the exemption that applies if the landlord cannot obtain a tenant’s consent to undertake improvement works (although a landlord is required under the MEES Regulations to use reasonable endeavours to obtain this in the absence of such a provision in the lease in any event).

What is the impact of the MEES Regulations on service charge provisions?

Landlords may be able to pass the cost of energy efficiency improvements to a building or estate down to tenants via the service charge.

• Leases granted before the MEES Regulations were envisaged will need to be considered on a case-by-case basis. The Landlord services descriptions in some lease may allow this. Landlords may struggle however if the service charge provisions exclude the cost of improvements (some only allow landlords to charge for repairs).
• In newer leases that have been granted with the MEES Regulations in mind it is becoming more common to see express rights to recover the cost of energy efficiency improvements. Whether or not this is agreed will depend on the relative bargaining strength of the parties and whether a tenant perceives that this will bring sufficient benefits to them over the life of the lease - such as reduced energy costs or boosting their green credentials. A compromise position could be that a landlord can opt for the greener option if it would not increase costs to the tenant by an agreed amount e.g. 10%.

What are sustainability schedules?

A further consequence of the MEES Regulations is the introduction in commercial leases of sustainability schedules. These contain sustainability agreements between landlords and tenants which generally include a co-operation provision in relation to environmental performance, a requirement to particate in an environmental forum and data sharing provisions. Again, some of the provisions we are encountering are much more onerous than others and where the parties end up will be determined by their negotiating position and their desire to be greener in their business operations.

Can a landlord insert provisions catering to the MEES Regulations into a lease that is being renewed pursuant to the tenant’s statutory right to renew under the Landlord and Tenant Act 1954?

The starting point for statutory lease renewals is that the lease is to be on the same terms as the existing lease. Departures are sometimes permitted, but they must be just and fair, or be required because the terms of the lease are out of date or unsuitable. They should not be detrimental to one party and if a landlord wants to propose a change it must show why this is required (O’May v City of London Real Property Co Ltd).

Whilst a couple of county court cases have been heard on this point so far (Saville-Eddells & Saville-Eddells v Jan and Clipper Logistics plc v Scottish Equitable plc) these are not binding decisions and focused rather narrowly on specific issues, the former whether an existing right of entry was sufficient and the latter whether an existing restriction on alterations was sufficient. Both did indicate a reluctance to shift the burden of compliance onto the tenant but at the moment the point has not been conclusively decided. We will therefore have to wait for a further binding test case before we will know the answer to this question.

How can we help you?

If you have any queries or concerns regarding any aspect of the MEES Regulations, whether you are a landlord, tenant or lender, please do not hesitate to contact us for our assistance. We can, for example, assist with portfolio reviews, reviewing and where necessary updating precedent documentation, advise on the potential for the recovery of costs of energy efficiency improvements from tenants, or provide advice to tenants disputing the same, and provide support for landlords making exemptions applications.

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