Minimum Energy Efficiency Standards (MEES) and the wider conversation around carbon neutrality and minimising our impact on the environment, have been hot topics for many years. For the property sector this gives rise to a number of questions which have the potential to create uncertainty for landlords and tenants alike and impact the tone of commercial conversations.
Under the existing MEES requirements, landlords of commercial properties in England and Wales are prohibited from granting new leases or (since April 1, 2023) continuing to let existing properties unless the property in question has an energy efficiency rating of E or higher (there are some exemptions to this). The consequence of failing to comply is a financial penalty and publication on a register of non-compliance.
The previous Conservative Government dramatically changed its position on MEES in October 2023 by rowing back on the previous requirement for all private rented properties to have an energy efficiency rating of C by 2025 and all Private Rented Sector (PRS) properties to have an energy efficiency rating of C by 2028. This was pushed back to 2027 in respect of private rented properties and 2030 in respect of PRS properties. As yet, there is no indication that the Labour Government is looking to change this position. PRS properties are properties which are built for rent and not for sale.
Despite the announcements made in October 2023, however, the general direction of travel remains firmly in favour of improving the energy efficiencies of rental properties. In view of this, many landlords and tenants are anticipating the future and having these conversations now with some landlords already investing in improvements to their properties.
Impact on property transactions
The potential fall-out from delaying the requirement to achieve a minimum C efficiency rating is still playing out but it is arguable that, as landlords carry out improvements to their properties, they may look to recover these costs through increased rents. That, in turn, could put further pressure on tenants and impact market value rental renewals where local comparisons are uplifted to reflect this. Tenants looking to futureproof against this may look to resist upwards-only market rent reviews and instead opt for index-linked reviews or even fixed uplifts.
Tenants may also look to only take leases of properties that already achieve an energy efficiency rating of C or above. That is likely to increase demand on the supply of such properties, potentially impacting rents and commercial conversations. Tenants could find themselves in an exceptionally competitive market where landlords do not need to off er as many incentives, such as rent-free or reduced rent periods.
On a human level, there also remains the practical reality that diluting landlord obligations to improve energy efficiency may see the costs associated with poorly insulated properties being passed down through heating bills to tenants who can least afford it. This is likely to have a disproportionate impact on lower income tenants who may already be facing increasing demands on their household budgets.
There will always remain a tension between the need to consider environmental factors and the necessity of energy efficiency improvements versus the cost to landlords of carrying out improvement works. That friction is currently being played insofar as landlords and tenants are having to pre-empt the future direction of travel and address this through their commercial conversations and lease negotiations.
The current market remains resilient and Howes Percival have further strengthened their Commercial Property offering in Milton Keynes with the arrival of new Associates Sarah Levett and Georgina McDonald both of whom trained in London firms and have a wealth of expertise and experience.
The Commercial Property team in Milton Keynes is also supported by Senior Associates Graham Jones and Charlotte Harrison, Consultant John Herd and is headed by Partner Marcus Carter. The team have a proven track record and have fostered a strong reputation in the market as a no-nonsense, commercial and proactive approach to matters with clients commenting: ‘The Howes Percival Team are excellent at providing a high standard of service in a timely manner. They are very quick to address potential issues and advise on solutions.’ and ‘I have never worked with a firm that regardless of time of year etc manages to still cover one another’s work load like this team manages’.
This additional recruitment into the Milton Keynes Commercial Property Team not only reflects the confidence in the performance of the Commercial Property team but also the continued growth and rising profile of Howes Percival in Milton Keynes and as a whole.
For more information visit the Howes Percival website or contact Marcus Carter at marcus.carter@howespercival.com
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