How do break clauses in commercial leases work?

Break clauses in commercial leases are commonplace. Still, it doesn’t stop alarm bells ringing for both a landlord or business tenant entering into a commercial lease arrangement for the first time. Below we look at what break clauses are, how these work and how to approach them.

What is a break clause in a commercial lease?

A break clause, also known as an option to determine, is a contractual provision providing both parties with a pre-defined mechanism to terminate the agreement early if certain conditions are met. This is a way of offering either party the flexibility to get out of their contractual obligations early, if their circumstances change, such as during an economic downturn.

For example, Company X enters into a 10-year commercial lease with a landlord for retail premises in 2022. The lease includes an agreed break clause whereby either party can terminate the tenancy at any point, on 6 months notice, after the first 3 years. In 2026, Company X experiences financial problems and needs to downscale to stay in business. The landlord is notified of the company’s intention to exercise the break clause and is given the required 6 months’ notice on 1st May 2026. The commercial lease agreement will then formally come to an end on 1st November 2026.

Alternatively, a break clause could provide a specified agreed date, possibly the mid-way point of the lease term, at which point either party can end the lease on the provision of notice.

How should a break clause in a commercial lease be approached?

Before formally entering into a commercial lease agreement, it is important for both parties to carefully consider the contractual provisions by which they will be bound. This is a matter of negotiation between the parties, including the lease term, and whether or not some flexibility should be factored into how long that term will last. This, of course, will depend on the circumstances of the respective parties, for example, a small start-up may be concerned about its longevity and will be looking to include an option to determine in case they hit hard times. Equally, a landlord may be thinking about marketing the premises tenant-free in a few years, or using the premises themselves, or would like the ability to easily remove any troublesome tenant.

However, there are some important considerations when including a break clause, not least the exact wording used to define its scope. The clause must be clear and transparent, and not open to interpretation, in this way minimising the possibility of any potential dispute that may arise over whether a break clause can be exercised and, if so, when the lease agreement will be treated as coming to an end. It is not uncommon for disputes to arise over the circumstances in which a poorly-drafted break clause can be exercised or exactly when a lease will terminate following the exercise of the clause and, as such, the extent of any remaining respective contractual obligations.

By seeking legal advice before signing a commercial lease agreement, steps can be taken to clarify the meaning of any break clause, with suitable amendments made to protect each parties’ interests.

Legal disclaimer

The matters contained herein are intended to be for general information purposes only. This blog does not constitute legal advice, nor is it a complete or authoritative statement of the law in England and Wales and should not be treated as such. Whilst every effort is made to ensure that the information is correct, no warranty, either express or implied, is given as to its’ accuracy, and no liability is accepted for any errors or omissions. Before acting on any of the information contained herein, expert advice should be sought.

Does a deputy or attorney get paid for what they do?

One of the most frequently asked questions around becoming a deputy or attorney, is whether or not a person can be paid for doing this role. The short answer is “no”, although a deputy or attorney may be able to pay themselves for any out-of-pocket expenses reasonably incurred in discharging their functions. They may also, subject to permission, be able to claim the cost of any care provided.

Below we look at what type of expenses and costs can be claimed as a deputy or attorney, and what steps can be taken to ensure that these are deemed reasonable.

What are the rules around expenses incurred by deputies or attorneys?

Even though managing another person’s affairs can be time-consuming, where that person lacks the mental capacity to do this for themselves, this is not a role for which a deputy or attorney can usually charge for their services. That said, a deputy or attorney is not expected to be out-of-pocket for what they are required to do, where all kinds of costs may be incurred, from postage costs for admin tasks to the cost of fuel when running errands, such as collecting benefits or doing banking.

Needless to say, reasonable expenses will also cover the cost of recouping any money spent by the deputy or attorney in paying a third party, such as paying a cleaner to clean the person’s house or paying a builder to carry out repairs to that property. Importantly, however, the deputy or attorney must be able to justify any costs incurred, for example, they must have done their due diligence for any property repairs, such as sourcing several different quotes from reputable and reliable firms.

What are the rules around the cost of care provided by a deputy or attorney?

When it comes to care costs, the position is far more complex.

Whilst it may be possible to claim a gratuitous care allowance for the cost of providing care to the person lacking mental capacity, or even case management services, such as liaising with relevant professionals or managing and overseeing support workers, a deputy or attorney should always seek permission from the Court of Protection first. This is because the deputy or attorney does not have the authority to remunerate themselves in this way, or any other family member, where to do so without the court’s express permission would be in breach of their fiduciary duty.

Instead, the court must be asked to assess the reasonableness or level of remuneration which the deputy or attorney, or any other family member undertaking care and case management services, should be awarded. This is a figure to represent the commercial cost of care as the ceiling, reduced by 20% to reflect the fact that these payments are not subject to Income Tax.

What records should deputies or attorneys keep of costs incurred?

In all scenarios, either when claiming expenses or seeking permission for care costs, careful records must be kept by the deputy or attorney of any costs incurred and tasks undertaken. Being able to provide clear proof and justification for claims made is absolutely paramount when it comes to what is reasonable, including when expenses were incurred and when tasks were undertaken, together with any evidence of this. In this way, there can be no questions over what is legitimate.

Legal disclaimer

The matters contained herein are intended to be for general information purposes only. This blog does not constitute legal advice, nor is it a complete or authoritative statement of the law in England and Wales and should not be treated as such. Whilst every effort is made to ensure that the information is correct, no warranty, either express or implied, is given as to its’ accuracy, and no liability is accepted for any errors or omissions. Before acting on any of the information contained herein, expert advice should be sought.

What are responsibilities and risks of being an executor?

Many people will feel privileged to act as an executor, being trusted with the responsibility of dealing with someone’s estate after they’re gone and ensuring that the deceased’s wishes are honoured. However, with this responsibility comes significant personal financial risk if an executor makes a mistake. So what are the responsibilities of an executor and what happens if they get this wrong?

What are the responsibilities of being an executor?

After someone has died, the executor to an estate has the role of administering that estate and ensuring that the beneficiaries receive everything to which they’re entitled under the terms of the Will. It is, therefore, important that any executor acts in the best interests of the beneficiaries at all times and the correct procedures are followed.

This means that each executor will need to identify and value all of the assets in the estate. They will then need to calculate and pay any Inheritance Tax that may fall due and apply for a Grant of Probate. Once the grant is received, any assets can be sold, all debts can be discharged and, once estate accounts have been prepared and approved, the residuary estate can be distributed to the beneficiaries.

What are the risks associated with being an executor?

Administering and distributing a deceased’s estate can be complex, involving various risks to the executor if they get this wrong, including but not limited to:

• Clearing debts: the executor must ensure that all of the deceased’s debts are identified and paid, where any failure to clear outstanding debts may mean that a claim can be made against the executor in the future, even if they were unaware of the existence of the debt due to an innocent oversight or genuine mistake. The risks to the executor are also exacerbated where there are insufficient funds to pay off all debts, as creditors must be paid in strict order of priority.

• Identifying beneficiaries: the executor must ensure that all beneficiaries who are entitled to inherit are identified. This is not always straightforward, for example, where the deceased’s Will provides for their estate to be shared between ‘all of their children’, but it is not clear how many or who these children are. This type of uncertainty is commonplace in the context of modern families, comprising several descendants from different marriages or relationships. Again, any failure to identify a beneficiary may mean that an executor is held personally liable to the extent of any legacy that any given individual would’ve been entitled to receive.

Other risks can arise around claims made against the estate from individuals who believe that they’re entitled to a share, disputes arising between those with an interest in the estate, or even where an executor mistakenly pays a bankrupt beneficiary, rather than the trustee in bankruptcy. In all of these scenarios, there is the potential for personal liability on the part of the executor.

How can the risks of being an executor be avoided?

The job of winding up someone’s affairs after their death is one that involves both responsibility and financial risk for an executor. It is, therefore, imperative that an executor seeks early legal advice, ensuring that the correct procedures are followed to minimise any exposure to personal liability — from advertising for creditors to checking for any bankrupt beneficiaries.

Legal disclaimer

The matters contained herein are intended to be for general information purposes only. This blog does not constitute legal advice, nor is it a complete or authoritative statement of the law in England and Wales and should not be treated as such. Whilst every effort is made to ensure that the information is correct, no warranty, either express or implied, is given as to its’ accuracy, and no liability is accepted for any errors or omissions. Before acting on any of the information contained herein, expert advice should be sought.

Dealing with hidden assets on divorce

On the breakdown of a marriage, it is not uncommon for the wealthier spouse to seek to hide their assets to help defeat any claim on divorce. However, for any party who tries to conceal their financial worth, and this comes to light, they can expect the court to flex its’ judicial muscles.

Below we look at the importance of disclosure during financial remedy proceedings and what steps can be taken by the court in favour of the financially weaker spouse to deal with underhand tactics. 

What are the rules relating to disclosure on divorce?

When a marriage irretrievably breaks down, and the division of martial assets cannot be agreed, the court may need to make an order. To do this, and to do so fairly in all the circumstances, the parties will be required to provide the court with what is known as ‘financial disclosure’. This is the process whereby both parties to a marriage are ordered to disclose details of their income, property and assets. This should include assets held jointly and individually. It should also include assets acquired prior to, during and even after the marriage has ended. In this way, the court can assess the parties’ respective economic needs, obligations and responsibilities in the context of their financial worth on divorce.

In some cases, there may be assets that one spouse knows nothing about. Still, even if one party has no knowledge that a particular asset exists, this must be disclosed to the court. This is because the parties are legally required to provide full and frank disclosure of their entire financial circumstances.

What are the consequences of non-disclosure on divorce?

There are various ways in which a financially stronger spouse may attempt to defeat or reduce a claim made against them on divorce. These can include converting assets into cash, temporarily transferring assets to family members, placing assets into sham trust mechanisms and moving assets offshore. However, whilst attempts to deploy these kinds of tactics can occasionally be pulled off, the courts have wide-ranging powers when it comes to dealing with anyone who is not playing fair. These include:

• Assessing an award based on the inferred wealth of a party, even if assets can no longer be located

• Notionally ‘adding back’ an asset to the matrimonial pot, as if the asset transfer had not taken place

• Varying or reversing the transfer of assets into a trust or other corporate structure

• Awarding a larger proportion of English-based assets in recognition that these are easier to locate

The courts can also revisit an order once made, setting this aside and ordering a party to pay any legal costs arising from previously undisclosed assets. More importantly, if a party is found by the court to have deliberately hidden assets, they could be potentially prosecuted for fraud.

If you know or suspect that your former spouse is seeking to hide or dissipate assets on divorce, expert legal advice should be sought immediately to help protect your position financially.

Legal disclaimer

The matters contained herein are intended to be for general information purposes only. This blog does not constitute legal advice, nor is it a complete or authoritative statement of the law in England and Wales and should not be treated as such. Whilst every effort is made to ensure that the information is correct, no warranty, either express or implied, is given as to its’ accuracy, and no liability is accepted for any errors or omissions. Before acting on any of the information contained herein, expert advice should be sought.

Key considerations when buying a repossessed property

Buying a repossessed property can provide investors and developers with an excellent opportunity to purchase an apartment or house at a significantly discounted price — in some cases, by as much as 30% less than their market value. Repossessed properties can also provide first-time buyers with a chance to get onto the property ladder. However, there are a number of key considerations that must be taken into account. This is because the process of buying a repossessed house is very different than through traditional methods.

Below we look at three of the most important factors that you will need to consider before buying a repossessed property.

#Key consideration 1 — the risk of being gazumped

Even though a lender has the right to repossess a property in circumstances where the borrower had been unable to meet their mortgage repayments, the lender is under a legal obligation to obtain the best possible price to cover any outstanding debt. This means that when an offer is made by a prospective buyer, the lender, or estate agent on their behalf, will usually publish a 'notice of offer’ in the local press inviting higher bids. In consequence, there is no certainty that your initial offer will be sufficient to secure the property, exposing you to the possibility of being gazumped and losing the property altogether, or being forced to increase your offer. Even then, the property will remain on the open market until completion.

#Key consideration 2 — the unavailability of replies to enquiries

As the repossessed property is being sold by or on behalf of the lender, who will have no personal knowledge of the property, they will be unlikely to be able to provide answers to many of the standard enquiries raised during the conveyancing process. This can include detail of any disputes with or complaints about neighbours, any notices or proposals that may affect the property, any rights and informal arrangements with neighbouring properties, or any alterations or changes to the property and whether consents and approvals were sought. This means that you must carry out a thorough visit to the property to satisfy yourself of such matters, and raise any queries that you may have with either your solicitor and/or surveyor.

#Key consideration 3 — the need to act very quickly

When buying a property under normal circumstances, timescales are relatively relaxed, typically to be agreed between the parties. In contrast, when buying a repossessed property, whether through an estate agent or auctioneers, time is of the essence. This is because the lender will want to recoup their money as quickly as possible. When buying a property at auction, once the hammer goes down, contracts are treated as exchanged. This means that you must pay a 10% deposit or reservation fee on the day, with the remaining balance usually payable within a period of 14 to 28 days. Even when buying a property through an estate agent, exchange of contracts is generally requested within 28 days of an offer being accepted, so you must have your finances in place so that you are able to proceed immediately.

There are a whole host of other factors to take into account when buying a repossessed property, where expert advice should always be sought first.

Legal disclaimer

The matters contained herein are intended to be for general information purposes only. This blog does not constitute legal advice, nor is it a complete or authoritative statement of the law in England and Wales and should not be treated as such. Whilst every effort is made to ensure that the information is correct, no warranty, express or implied, is given as to its’ accuracy, and no liability is accepted for any error or omission. Before acting on any of the information contained herein, expert legal advice should always be sought.

How to repay a help-to-buy equity loan

If you took advantage of the government’s help-to-buy scheme to put you on the property ladder, you may now be looking to pay off the equity loan that was used towards the cost of buying your property. This could be because you’re selling up, have cash savings or are looking to remortgage. Below we look at some of the factors involved in how to repay an equity loan, including how much this will cost, the process to be followed and if a solicitor will be needed.

How much will it cost to pay off an equity loan?

The total amount of help-to-buy equity loan that you will need to repay is not fixed to the amount originally borrowed, but instead calculated based on the market value of your property at the time that you choose to repay and the equity loan percentage amount.

This means that the repayment amount can be lower or higher than the amount originally borrowed. If you are selling, the repayment figure will be calculated based on either the approved current market value or the agreed sale price, whichever is the higher. The amount you will need to repay also includes interest, fees and any outstanding payments.

What is the process to repay an equity loan?

The process to repay an equity loan will depend, in part, on your method of repayment. As your equity loan will be secured as a second mortgage over the title deeds to your property, you may be looking to increase your borrowing on your first mortgage and use this to pay off some or all of your equity loan. If you want to repay just part of your equity loan through remortgaging, you’ll first need to get permission from the administrator for Homes England to change your mortgage provider and increase your borrowing on your existing mortgage.

Provided permission has been sought from Homes England, where applicable, or where you are using the proceeds of sale or cash funds to repay your equity loan, you will then need to instruct an RICS-approved surveyor to inspect your property and provide a valuation report to confirm its current value. You will be responsible for the surveyor’s costs in this regard.

Once you have the valuation report, this will need to be submitted to Target Services Ltd, together with their loan redemption form and administration fee, in order to obtain a redemption figure. Target is a private company appointed by Homes England to administer the repayment of equity loans under the help-to-buy scheme. The valuation report will be valid for a period of 3 months from the date of issue. If repayment does not take place within this timescale, you will need to arrange and fund the cost of an additional desktop valuation.

Is a solicitor needed to deal with the repayment process?

Given that your equity loan will be secured against your property, a specific legal process will need to be followed to ensure its removal once you have paid this off in full. This means that you will need to instruct a solicitor to carry out the legal conveyancing to repay the loan, including checking with Land Registry that the equity charge has been removed.

The legal fees for your solicitor dealing with the transaction will vary depending on the nature of your financing for the repayment of the help-to-buy equity loan.

Legal disclaimer

The matters contained herein are intended to be for general information purposes only. This blog does not constitute legal advice, nor is it a complete or authoritative statement of the law in England and Wales and should not be treated as such. Whilst every effort is made to ensure that the information is correct, no warranty, express or implied, is given as to its’ accuracy, and no liability is accepted for any error or omission. Before acting on any of the information contained herein, expert legal advice should always be sought.

Equity Release FAQs

Equity release schemes are aimed at those 55 or over looking to free up some equity in their property, while continuing to live there and without making monthly repayments. Needless to say, there are both benefits and drawbacks to these types of schemes, where answers to the following frequently asked questions will help homeowners to make an informed decision.

What is equity release and how do this work?

A growing number of people in later life are finding themselves ‘property rich but cash poor’, where equity release is the process by which a homeowner can extract some or all of the wealth tied up in their property by way of regular payments or a cash lump sum.

There are two main types of equity release schemes:

•   a lifetime mortgage: where a loan is secured against the property, but ownership retained, and the loan repaid from the homeowner’s estate once they die. The interest on the loan can either be repaid at regular intervals, or rolled up and repaid on redemption of the loan;

•   a home reversion plan: where part or all of the property is purchased by the scheme provider, but the seller will be permitted to live in the property rent-free under a lifetime lease. When the property is sold, typically after the seller dies or moves into long-term care, the provider will be entitled to their percentage share by way of repayment.

What are the benefits of equity release schemes?

There are various benefits to equity release, although the advantages involved will depend on the nature of the scheme. In broad terms, equity release schemes will:

•   give you tax-free cash, with the freedom to spend this on anything you want

•   allow you and others to benefit from your wealth during your lifetime

•   enable you to continue living in your current home, without the upheaval of moving.

The ‘no-negative equity guarantee’ offered by lenders approved by the Equity Release Council also means that the amount of money borrowed against the value of your home, plus any rolled-up interest, can never go above the value of that property.

What are the drawbacks of equity release schemes?

There are various drawbacks with equity release, although again the disadvantages will depend on the nature of the scheme. However, in broad terms, equity release schemes will:

•   be unlikely to pay you the full market value for your home, where you will receive far less money, comparatively, than you would from selling the property on the open market

•   diminish the value of your estate, where this will reduce the amount of inheritance that your beneficiaries would otherwise receive after you die

•   potentially reduce your right to means-tested benefits, including funding for social care.

Which equity release scheme is right for me?

For each of the two equity release schemes, there are various options available, where it’s important that both the immediate and future needs of the homeowner are matched with the right type of scheme. The importance of seeking expert advice from a qualified professional cannot be underestimated, so that you fully understand the long-term implications, with sufficient knowledge of the risks, rewards and legal obligations under your preferred scheme.

Legal disclaimer

The matters contained herein are intended to be for general information purposes only. This blog does not constitute legal advice, nor is it a complete or authoritative statement of the law in England and Wales and should not be treated as such. Whilst every effort is made to ensure that the information is correct, no warranty, express or implied, is given as to its’ accuracy, and no liability is accepted for any error or omission. Before acting on any of the information contained herein, expert legal advice should always be sought.

Taking the stress out of financial disclosure

When a couple separates, it’s important for each party to fully understand the financial worth of their ex before entering into any negotiations as to the division of marital or partnership assets. So as to provide transparency, and to enable the court to make or approve an order that’s fair in all the circumstances, the parties are required to provide ‘financial disclosure’. Below we look at how this process works and how to minimise the stress involved.

What is financial disclosure?

Financial disclosure is the process whereby both parties to a marriage or civil partnership are required to exchange financial information in relation to their respective incomes, property and any other financial resources which each has the benefit of. This includes any assets held on both a joint and individual basis, together with valuations, as well as assets acquired prior to, during and even after the marriage or civil partnership has irretrievably broken down.

In some cases, both spouses or civil partners may be fully aware of each other’s financial worth, including any solely-owned assets — whilst in others, one party may have no knowledge whatsoever that particular assets exist, let alone how much these are worth.

How is financial disclosure made?

The parties are legally required to provide full and frank disclosure of their financial and other relevant circumstances, in a clear and accurate way, otherwise risk having an order set aside and being ordered to pay any associated costs. Moreover, if a party is found to have been deliberately untruthful, criminal proceedings may be brought against them for fraud.

This means that the parties will be required to complete, and sign with a statement of truth, what’s known as Form E. This is a lengthy and detailed legal document that can potentially run into hundreds of pages long, once all documentary evidence in support has been attached. Needless to say, this process can be daunting, and extremely stressful, when an individual is already having to deal with the emotional fallout from the breakdown of their relationship.

How can the stress be taken out of financial disclosure?

Even though completing Form E is no easy task, the following three top tips should be followed to help ease the pressure when going through this process:

• Read Form E carefully: your solicitor can help guide you through this process, although Form E itself sets out exactly what’s required so that you know what to expect. By printing off a copy of Form E, you can make one of these your draft 'to do' list. Once you’ve got all the necessary information, you can print a fresh copy to complete and forward to your solicitor.

• Be organised: by starting your ‘to do’ list early, gathering the relevant documents to accompany Form E, you will minimise the stress of meeting any deadline. A great deal of the information required will need to be requested from third parties, such as home and pension valuations, where it can take weeks to receive this information. It’s important that you give yourself plenty of time to prepare what you’ll be required to disclose.

• Be thorough: the parties are required to be completely up front about all the assets they own, even if their ex has no knowledge of these. Equally, it’s important not to make any accidental omissions, where there may be significant costs and other consequences for failing to disclose an asset or source of income, even if this was a genuine mistake.

Legal disclaimer

The matters contained herein are intended to be for general information purposes only. This blog does not constitute legal advice, nor is it a complete or authoritative statement of the law in England and Wales and should not be treated as such. Whilst every effort is made to ensure that the information is correct, no warranty, express or implied, is given as to its’ accuracy, and no liability is accepted for any error or omission. Before acting on any of the information contained herein, expert legal advice should always be sought.

The importance of warranties when buying a business Vs the importance of disclosure when selling a business

The importance of warranties when buying a business so as to protect the purchaser against undisclosed risks cannot be underestimated. Equally, from the seller’s point of view, providing written disclosure of any existing issues to limit liability for any warranties made can be crucial. Below we look at how warranties work in the context of two competing principles: ‘caveat emptor’ (let the buyer beware) versus ‘caveat venditor’ (let the seller beware).

What are warranties and how do they work?

Warranties are contractual statements regarding the affairs of the company or business being sold, given by the seller to the buyer prior to the point of sale. These are usually incorporated into the sale/purchase agreement and can cover a wide range of areas, from ongoing employment disputes to ownership of assets and the condition of plant and equipment.

If a seller provides a warranty but it subsequently transpires that this was untrue at the time it was given, the buyer may have a claim in damages against the seller. In this way, warranties can be used to protect a purchaser from any undisclosed risks when buying a business.

Under English law, unless warranties have been made prior to the point of sale, a purchaser will be afforded very little protection when buying a business. This is due to the well-established principle of 'caveat emptor' or ‘buyer beware’, under which the buyer alone is responsible for checking the viability of, and risks attached to, a business before proceeding.

Nonetheless, where warranties have been made by the seller, the extent of any liability under those warranties can be limited, albeit only where the seller has provided full and formal disclosure of any pertinent issues against a particular warranty. Under the lesser-known principle of ‘caveat venditor’ or ‘seller beware’, absent detailed written disclosure — even where the buyer was otherwise aware of the matter complained of and for which damages are sought — the seller is likely to remain liable in full in respect of any warranties given.

What are the potential consequences of breach of warranty?

In the recent decision of Equitix EEEF Biomass 2 Ltd v Fox & Others [2021] EWHC 2531, the High Court ordered that the sellers pay the buyer £11 million in damages for breach of multiple warranties contained within a written share sale agreement.

On its’ facts, the buyer purchased the entire issued share capital of an energy company. The sale agreement contained multiple warranties given by the sellers, including a warranty that the company’s biomass boilers were in good condition. Following the sale, faults with the boilers led to the loss of its’ sole customer to whom the company supplied heat energy.

The court rejected the seller’s argument that they’d disclosed against the warranties and/or that the information was within the buyer’s actual knowledge, such that the warranties could not be relied on. Notwithstanding that the buyer had been aware of certain issues, the court found that the sellers’ liability for any warranties given would only be limited if specific disclosure had been made, prior to completion, against the warranty in question. Equally, disclosure must be made in sufficient detail for the buyer to fully understand the true picture.

Legal disclaimer

The matters contained herein are intended to be for general information purposes only. This blog does not constitute legal advice, nor is it a complete or authoritative statement of the law in England and Wales and should not be treated as such. Whilst every effort is made to ensure that the information is correct, no warranty, express or implied, is given as to its’ accuracy, and no liability is accepted for any error or omission. Before acting on any of the information contained herein, expert legal advice should always be sought.

New EPC requirements for commercial leases

With new minimum energy efficiency standards (MEES) for non-domestic private rented properties due to come into force next year, landlords should already be taking steps to meet the necessary energy performance indicator. Below we look at what these changes mean for commercial landlords, as well as the proposals for commercial MEES beyond 2023.

What is the minimum level of energy efficiency required?

With the phased introduction of the Energy Efficiency (Private Rented Property) (England and Wales) Regulations 2015, subject to prescribed exemptions, private landlords of non-domestic properties in England or Wales have not been permitted to enter into new lettings with an EPC rating of less than ‘E’ — including lease renewals and lease extensions — since 1 April 2018.

As from 1 April 2023, this requirement will apply to all private rented properties in England and Wales, even where there’s been no change in tenancy arrangements. This means that the MEES threshold will apply to existing commercial leases, where landlords will not be able to continue to let properties with either an ‘F' or ‘G’ EPC rating, albeit subject to any exemption.

What steps should commercial landlords be taking to meet this standard?

Given that the clock is now ticking until the new MEES for existing commercial lettings comes into force, landlords should be assessing the EPC ratings of any rental properties within their portfolio to see if they fall below the required threshold.  Where necessary, they should also be putting in place a pro-active strategy to make adequate energy efficiency improvements to any properties with a current ‘F’ or ‘G’ EPC rating.

This could mean, for example, replacing windows and doors, or installing more energy efficient heating and water systems. It will also mean liaising with existing tenants to enable works to take place, ideally during closing hours to minimise any business interruption.

As it’s the landlord’s obligation to ensure that the EPC meets the minimum rating, this responsibility cannot be passed to the tenant. Further, some or all of the cost of any energy efficiency improvements can only be passed to the tenant via any service charge, if the terms of the lease allow for this.

What are the consequences of non-compliance with the new EPC rating?

Once the regulations have fully come into force, it will be illegal for a landlord to let out a non-domestic private-rented property which falls below a minimum 'E' EPC rating —unless, for example, all the relevant energy efficiency improvements for the property that can be made have been made, and the property remains sub-standard, or one of the other prescribed exemptions apply. Further, even where a legitimate exemption applies, this must be validly registered on the PRS Exemptions Register before this can be relied upon.

In short, in the majority of cases, landlords will be unable to lease any building that has an EPC rating lower than E, where non-compliance could result in enforcement action and a sizeable fine, potentially running into tens of thousands of pounds.

What further changes are likely to take place when it comes to energy efficiency?

In addition to the changes due to take place next year, further changes to MEES for commercial properties are expected across the UK. The 2023 changes are effectively a precursor to reaching the government’s new set target for all commercial rented properties to have a minimum EPC rating of 'B' by 2030. This is also likely to be implemented in two stages, with a phased incremental increase to a C-rating by 2028.

As such, although it may be tempting for landlords to target the bare minimum EPC ‘E’ rating due to come into force in 2023 for existing commercial lets, by aiming higher, landlords will be future-proofing their properties from more stringent standards soon likely to take place.

Legal disclaimer

The matters contained herein are intended to be for general information purposes only. This blog does not constitute legal advice, nor is it a complete or authoritative statement of the law in England and Wales and should not be treated as such. Whilst every effort is made to ensure that the information is correct, no warranty, express or implied, is given as to its’ accuracy, and no liability is accepted for any error or omission. Before acting on any of the information contained herein, expert legal advice should always be sought.