MEES: The Implications for Rent Reviews, Lease Renewals and Valuation

The Energy Efficiency (Private Rented Property) (England and Wales) Regulations 2015, better known as the Minimum Energy Efficiency Standards or MEES will be introduced on 1st April 2018 with many commercial properties at risk of non-compliance. 

This legislation could have an impact on the following factors:

  • Rent reviews
  • Statutory lease renewals

These are explored further in our whitepaper which is available to download now.

What are the impacts of MEES?

As of 1st April 2018, a non-domestic property cannot be let unless it obtains an Energy Performance Certificate (EPC) at a minimum rating of E. If a property fails to meet the minimum standard, there must be measures put in place in order to identify relevant energy efficiency improvements. These improvements must be implemented before the property can be let, even if the EPC rating does not improve. Additionally, in many cases, there will be a financial cost to compliance and this should be understood and considered in the context of rental valuations at rent review and lease renewal.

What to expect in our whitepaper?

Our in-depth whitepaper differs from others as, for the first time, arbitrators and solicitors have been engaged to identify and quantify this risk using a realistic case study building and lease. It includes focus on whether risks to value are real and, if so, to what effect. As we know, the property industry has had time to debate the effects of MEES and the current expectation is that the incoming regulations will potentially suppress rental levels at rent review and lease renewal. If rental growth is suppressed then, all things being equal, growth in capital values will likewise be suppressed.

The findings

  • We find that the risks implied by MEES are real. Valuers will be able to develop highly polarised arguments in rent negotiations depending on whether they are appointed by the landlord or the tenant. Our detailed case study suggests the possible effect of MEES regulations on value ranges from a sum slightly in excess of the cost of relevant energy efficiency improvements, to one considerably in excess of the cost of relevant energy efficiency improvements, leading to a reduction of over 10% in the building’s capital value.
  • It is unlikely that leases ‘inside’ the 1954 Act[1] will escape any impact on value from MEES. However, the main impacts on value will tend to follow statutory lease renewals. Leases inside, or indeed, outside of the 1954 Act might only be affected at rent reviews if transactional evidence proves the existence of a rental discount.
  • Central to this debate on value impacts are the typical lease covenants relating to the hypothetical letting, and the provisions of section 34 of the 1954 Act.
  • The regulations place a great deal of importance on the EPC. As such, holding an inaccurate EPC could have serious and expensive consequences for a landlord.

Find out more by downloading our full whitepaper.

Download Whitepaper