What I’m about to write will come as a great shock to many operators in the serviced and managed office industries: you may not be able to sign up clients for more than 6 months as of April next year. This is less than a year away!
Why is the flexible workspace market at risk?
As of April 1 2018 landlords are no longer able to lease out commercial office space in buildings with an F or G EPC rating unless a time-limited exemption applies, which must be registered on an Exemptions Register.
Many serviced and managed office providers thought that they were exempt from this rule as they are not the primary landlord, however this regulation applies to any tenancy agreement over 6 months and this can include sub-leases and agreements sometimes referred to by serviced operators as licenses (we’d recommend that you speak to your solicitors to determine if your “license” really is a license or a lease/tenancy). This creates something of a challenge for the serviced workspace sector. But they are not the only ones who are not aware of the legislation: in a recent survey by Property Week magazine, 32% of all respondents did not know what MEES was and how it would impact their business.
MEES represents a significant risk to companies looking to sub-let space, because they may be treated as a landlord and as a result must undergo the same process of due diligence as the superior landlord.
What about the rest of the market?
Outside of the serviced office sector, occupiers of all types of non-domestic property may struggle to sublet sub-standard space without undertaking improvement work, the benefit of which may ultimately revert to the superior landlord. And while assignments are not captured until 2023, sub-standard properties may become stigmatised by their poor EPC rating making this type of transaction difficult. Indeed, there are already occupiers, such as Government and large corporates that will not lease sub-standard space. As an example, EVORA was recently engaged to develop an EPC improvement strategy by a fund landlord that needed to obtain a C EPC rating to secure a Government department. This requirement for a C rated property goes far beyond the requirements of MEES, highlighting the growing importance of EPCs as a benchmark for predicted energy efficiency.
Landlords with E (or even in some cases D) rated properties may still be at risk because the EPC calculation is dynamic. The calculation methodology is linked to Part L of Building Regulations which deals with the conservation of fuel and power in new properties. Part L, like most of Building Regulations, is updated on a periodic basis and the minimum energy efficiency targets in Part L have to-date been strengthened with each successive iteration. This has impacted the EPC rating, and in particular the changes adopted in 2010 affected EPC ratings from 1 April 2011 onwards (the date on which EPC software was updated). In plain English, what this means is that an E rated property before 1 April 2011 if reassessed today is likely to be an F or G rated asset if nothing in the building has changed. This means that planned preventative maintenance and improvements will need to factor in these regulations.
Failure to comply with the regulations will result in fines of between £5,000 and £150,000. The enforcement authority may also impose a publication penalty. This means that the enforcement authority will publish some details of the landlord’s breach on a publicly accessible part of an Exemptions Register.
What actions can you take?
Here is The EVORA 10-point Strategy for Managing MEES
- For landlords with multiple assets, such as funds or workspace providers, review how you store your data. This should be digitalised and in a central and accessible location
- Identify where there are gaps in the data (missing EPCs etc.) and identify those assets that are at risk by virtue of their (EPC) rating, capital or rental value and/or a lease or transactional event
- Consider the use of software such as EVORA’s highly versatile, market-leading platform, SIERA
- Use or involve CIBSE (Chartered Institution of Building Services Engineers) accredited assessors, or assessors that work for a recognised and reputable engineering practice – preferably with additional professional qualifications (such as those recognised by the Engineering Council)
- Have your professional EPC assessor review the existing certificate for accuracy and relevance
- If it is necessary to prepare a new EPC, ask for an indicative (draft) certificate. The assessor may be able to deliver an improved rating by using better quality data and/or by having better knowledge of building services. However, if the asset remains at risk from MEES, then commission a strategy to improve the building to include capital costs, energy savings and, where appropriate, life cycle costs
- Review point 6 in the context of the lease(s) and the fund or asset management strategy
- Consider ways to recuperate capital costs through energy savings or asset management driven opportunities
- Ensure you retain future access to the energy model used to prepare the EPC and utilise it for energy and asset management purposes, including MEES management. After all, you paid for it!
- Finally, to ensure that you’re getting the best result from your EPC-driven improvements, review how operational performance can be monitored to determine if the predicted energy savings align with the operational realities. Again, SIERA can assist with this, thanks to its intuitive and easy-to-use monitoring and targeting capabilities
This all sounds very onerous, but in fact MEES should be regarded as an opportunity.
MEES is obviously an opportunity to save money through reduced energy bills and resultant CO2 emissions, and energy efficient buildings are more likely to help deliver a productive working environment.
There are also opportunities for occupiers to use MEES to mitigate rental increases after 1 April 2018 as a result of rent reviews and lease renewals. And it may be the case that occupiers can use MEES to reduce or remove any liability towards dilapidations.
MEES is a great opportunity to engage with tenants, but if that were not incentive enough – MEES will become increasingly synonymous with building value and building resilience. Improve your EPC rating and you reduce your risk, and this could influence yields and even, in time, headline rents.
Energy savings could provide an opportunity to look at alternative methods of financing, using the value (£) of the energy saved to redeem finance. This could provide a cost-effective method of improving your estate.
Finally, for those looking to buy or sell sub-standard properties, MEES introduces an opportunity to discuss the price!
As CIBSE accredited assessors, we are perfectly positioned to support you with EPCs and MEES compliance. Please don’t hesitate to get in touch.