As part of its pledge to reach net zero carbon emissions by 2050, the UK government introduced Minimum Energy Efficiency Standards (MEES), which made it unlawful from 2018 for landlords to grant new leases or to renew existing leases on commercial properties with an Energy Performance Certificate (EPC) below E. EPCs are used to determine a property's energy efficiency and carbon emissions, with A being the highest possible score, and G being the lowest. The purpose behind the introduction of MEES was to encourage the owners of the country's ageing, non-eco-friendly buildings to improve their energy efficiency.
Starting in April 2023, MEES will apply to all commercial property, making it an offence for landlords to let commercial property with an EPC rating below E, regardless of whether the lease is in the middle of its term unless there is a legitimate reason permitted by and registered in accordance with the MEES Regulations. The UK government is also said to be considering introducing legislation under which only A or B rated commercial buildings will be eligible to be let by 2030.
It is easy to see why this creates a potentially massive problem for UK commercial property owners. Approximately two-thirds of London workspace is currently rated with an EPC between D and G and Savills estimates that nine out of every ten offices in major UK markets will be unable to meet energy efficiency standards by 2030 unless owners – many of whom are small landlords, individual investors or belong to family offices – are willing to spend heavily to bring their properties up to MEES requirements. In simple terms, there is a significant amount of commercial property in the UK in dire need of refurbishment.
According to a recent article by George Hammond in the Financial Times however, the need to refurbish does present London's established property developers with a significant opportunity to purchase old commercial properties from current owners who "face a choice between investing heavily in environmental upgrades, selling at a discount or risking their buildings becoming stranded assets." Hammond believes that a growing number of small-scale commercial property owners are expected to "sell-up" rather than bear the costs needed to bring old buildings up to the standards of modern offices.
MEES has imposed, and will continue to impose, stringent energy and environmental standards on owners of old and inefficient buildings. For many, this will mean selling - most likely at a discount - rather than facing the significant costs of upgrades. Conversely, this presents a valuable opportunity for those who can afford to buy these assets and refurbish them.
For more information, or if you would like to discuss any aspect of this article generally, please contact either Jonah Cohen or Charlotte Whitworth.