MEES – how can businesses occupying property protect themselves?

Irwin Mitchell recently surveyed 500 business occupiers to gain a better understanding of what’s driving their occupational decisions. One of the most surprising statistics was that only 32% of business occupiers surveyed said they knew the Energy Performance Certificate (EPC) rating of their main office building and only 31% knew what EPC rating their office needs to be in April 2023 when the Minimum Energy Efficiency Standard (MEES) Regulations come into force.

From 1 April 2023, landlords can face a significant fine if they continue to let a property which is substandard from an energy performance perspective – an EPC of F or G. However, business occupiers should also be alive to the changes and what landlords might be doing which might impact them.

Service charges

Landlords may look to the service charge mechanism to recover the cost of energy improvement works from tenants. Whilst in most cases, it is likely that pure improvement costs will not be recoverable either because the item in question is not in fact in disrepair or the remedial works go beyond repair, it does not follow that simply because the works are an improvement that they will not be caught by the right to recover in the service charge clause. For example, if the only practical way to repair the item is to replace it with an item which happens to be more energy efficient then the tenant could be obliged to pay for that work.

Dilapidations

There are some equally challenging issues in relation to dilapidations claims where tenants will often have obligations to repair, decorate, reinstate and comply with statutory obligations.

First off, many tenants may be able to take advantage of various potential defences. For instance, a landlord who relies on the provision in the lease which requires the tenant to comply with statute to recover energy improvement works is likely to fail. The regulations do not impose an obligation to carry out energy improvement works; they simply result in a fine (for the landlord) if the premises are not compliant. Tenants may also be able to rely on the defence of supersession because, even if an item is in disrepair, the landlord’s subsequent improvement works may supersede the tenant’s obligations to repair. The landlord has essentially suffered no loss because of the tenant’s breach.

However, tenants should still be wary. For instance, as in the example above, simply because a landlord replaces obsolete electrical or mechanical plant with a modern, more energy efficient equivalent does not mean that the tenant will necessarily escape liability.  In those circumstances, ultimately the issue is likely to be whether the new item is recognisably different to the obsolete item in disrepair.

Business lease renewals

Renewing an existing lease which is protected by the Landlord and Tenant Act 1954 (LTA 1954) has already given rise to a number of disputes and there will almost certainly be more court decisions as the energy requirements tighten in the coming years. For instance, on renewal landlords may well be keen to add ‘green’ lease terms which might include allowing the landlord to carry out and recover the costs of energy improvement works from the tenant. Landlords will want to vary the lease to prevent tenants carrying out alterations that might lower the building’s EPC rating and put safeguards in place should that happen. Broadly, under the LTA 1954, on renewal parties can depart from the current lease terms provided that departure is reasonable. The court have so far been slow to accept that changes sought by the landlord to comply with the regulations are reasonable where that change imposes an additional burden on the tenant.

Summary

We are likely to see more disputes between landlords and tenants arising from the application of the regulations. Often the best opportunity tenants will have to protect themselves is when negotiating the lease at the outset but for those tenants facing issues during or at the end of their existing leases it’s important that they engage specialist professionals before the dispute escalates in order to properly protect their position.

Tim Rayner is a partner and joint head of real estate disputes and Sana Ikhlaq is a solicitor in the real estate disputes team at Irwin Mitchell