An overview on the Minimum Energy Standards and possible implications on Dilapidation Issues.

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Bradley-Mason LLP

The Minimum Energy Performance Standards (MEES or ‘MEPS’) will affect commercial property Landlords and Tenants from the 1st April 2018.  The new legislation (MEES) came into force following the Houses of Parliament approving The Energy Efficiency (Private Rented Property in England and Wales) Regulations 2015 under the Energy Act 2011 in March 2015.

The regulation triggers a mechanism that allows enforcement of Minimum Energy Efficiency Standards (MEES) within Private Rented Property across England and Wales under the Energy Act 2011.  From the 1st April 2018, a lease or lease renewal will be unable to be granted of a commercial property with an Energy Performance Certificate (EPC) rating of F or G.  With all leases of Private Rented Properties that commence before 1st April 2018 must comply from the 1st April 2023.

MEES, however, does not affect freehold sales and purchases however, could have a negative impact on the value of a property.  Also, the regulations do not affect owner-occupiers or tenants until 2023 unless they wish to sub-let.

Further exemptions depending on the type of building (place of worship, listed etc.), tenancy agreement length and impacts on the buildings structure if improved.  *Please contact us for more information on exemptions.

Even though the legislation does not come into effect until April 2018 for commercial properties landlords and tenants should begin to think about the impact and take time to analyse the implications to current and new lease tenancies.  This is even more imperative with the potential penalty notices that could be enforced on Landlords if they breach the legislation.  Financial penalties can reach a maximum of £150,000.

The Impact MEES will have on Dilapidation Matters

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The legislation will affect existing leases from the 1st April 2023, which will cause a headache for dilapidation surveyors advising their client on interim and terminal dilapidation matters on properties that don’t meet the MEES requirements.

Mid-term issues such as improvements to M&E plant will need to be discussed between the LL and T in relation to logistics of undertaking the works.  If tenants refuse access ‘Get-out’ clauses within leases could be triggered.

It is certain that there will be an increased take-up of collaborative ‘green’ lease provisions to facilitate access for improvements in accordance with MEES.  Service charge issues which look to exclude liability for energy enhancements to minimise financial exposure will become a prevalent issue.

Tenants could negotiate a cheaper/free rental period over the course of the works being implemented for inconvenience to business disruption if you take on a current F or G stock building.  This therefore supports the need for Technical Due Diligence at the pre-construction stage.

In the case of a building with a poor EPC, the question of supersession will inevitable arise if, at lease end, a landlord needs to implement extensive works to bring the building up to MEES compliance standard.  Wholesale replacement of mechanical or electrical equipment due to poor energy efficiency rather than disrepair will fall outside of a typical repairing obligation under a dilapidations case.  A significant portion of a dilapidations claim could be extinguished if replacing plant leads to a further full refurbishment of the building.

Summary:

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As with any hot topic in the Building Surveying profession, MEES is no different and there are a varying opinions on the impact of this regulation especially in relation to dilapidations claims.  As ever dilapidations matters must be considered on a case by case basis with regard to the lease documents and issues with the specific property.

Whilst MEES do not fundamentally change standard dilapidations procedures, energy enhancement works both mid-term and at term end will surely increase in prevalence and the impact of such improvements must be considered.

Landlords need to identify cost effective improvements early on and put in place strategic plans for implementing such works in advance of the 2018 and 2023 deadlines.

All parties of a lease need to understand the implications of this new legislation and the possible outcomes both mid-term and at lease end regarding dilapidation issues. For more information please contact one of our team.

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