PART 2 – MEES reform for commercial property: what this means for landlords, investors, and occupiers

Part 1 of this Keynote series examines the Government’s interim response on MEES reform for larger commercial buildings. This Part 2 considers what those changes could mean in practice for landlords, investors, and occupiers.

THE IMPLICATIONS FOR LANDLORDS AND INVESTORS

1. Larger v smaller asset owners

For owners of commercial properties over 1,000 sq m, the direction of travel is now much clearer:

• EPC B by 2031 is now the Government’s central policy objective for larger rented buildings (subject to legislation).

• The timetable has been pushed back compared to earlier 2030 proposals.
• Achieving EPC B may still require significant capital investment and long-term asset management strategies.

Early portfolio reviews and retrofit planning are likely to be critical in managing future compliance risk and protecting asset value.

For owners of smaller commercial properties under 1,000 sq m, there is short-term regulatory stability:

• The EPC E minimum standard remains in place.
• There is currently no proposal to increase the minimum standard beyond EPC E for these buildings.

However, the absence of reform should not be interpreted as a permanent position. The broader policy direction towards higher energy efficiency standards remains unchanged, and future tightening cannot be ruled out.

2. EPC B becomes a core asset risk issue

For landlords of buildings over 1,000 sq m, the proposed EPC B standard by 2031 (where cost-effective) is likely to become a central consideration in valuation and liquidity of assets, financing and refinancing discussions, and portfolio strategy and disposals.

Even with a longer lead-in period than previously expected, the scale of works required for some assets may be significant.

3. Retrofitting cannot be deferred indefinitely

While the removal of the interim EPC C milestone buys landlords additional time, it does not remove the need to plan for future compliance. Landlords should be cautious about deferring works entirely:

• Retrofit programmes for larger assets are often multi-year projects.
• Building constraints (e.g. listed status, design limitations) can restrict available upgrades.
• Costs may increase if improvements are compressed into a shorter time window closer to 2031.
• Tax incentives and allowances that are currently available are subject to future policy change and may diminish; often, early adopters achieve greater savings.

4. Lease structures will need closer scrutiny

MEES compliance is not just a technical issue; it is also a lease allocation issue.

Key considerations include:

• Ability to recover improvement costs through service charge or other mechanisms
• Green lease provisions, including cooperation obligations and data sharing
• Restrictions on alterations, which may need to be relaxed to enable upgrades
• The extent to which tenants’ fit-out or operational behaviour affects EPC ratings

Although MEES obligations typically sit with landlords, delivery will often require tenant cooperation.

5. The payback test provides flexibility, but not immunity from risk

The retention of the 7-year payback test and exemptions regime indicates that landlords will only be expected to implement measures that are cost-effective.

While exemptions may limit compliance obligations, they do not necessarily preserve asset value or protect against changing occupier expectations. Investors and occupiers are increasingly demanding stronger ESG credentials regardless of the legal minimum, and some buildings may struggle to meet occupier and investor expectations long before they become legally non-compliant.

THE IMPLICATIONS FOR OCCUPIERS

1. Potential for lower operating costs

The Government’s rationale for targeting larger buildings is that upgrades could deliver material energy bill savings for tenants.

For occupiers, improved EPC ratings may translate into lower energy costs over time, improved building performance, more efficient working environments, and enhanced alignment with corporate ESG targets.

2. Cost recovery and pass-through risk

A key issue for occupiers will be whether the costs of upgrading buildings to meet future standards are passed through to tenants under the terms of their leases. Depending on lease terms, tenants may face service charge contributions towards capital works, indirect costs through higher rents or re-gearing, and disruption from retrofit works affecting business operations.

Where leases are silent or ambiguous, disputes may arise as landlords seek to recover or reallocate upgrade costs.

3. Increasing operational obligations

Occupiers may be required to play a more active role in supporting compliance, particularly where energy performance is influenced by occupational use patterns, landlords require data sharing (e.g. energy consumption), or there are restrictions on tenant alterations that could negatively affect EPC ratings.

This reflects a broader shift towards shared responsibility for building performance.

4. Greater scrutiny in lease negotiations

For both new leases and renewals, occupiers are likely to focus more closely on:

• green lease clauses and sustainability provisions
• cost allocation mechanisms for energy efficiency works
• rights to carry out works or refuse disruptive upgrades
• alignment between EPC performance and corporate sustainability commitments.

In practice, MEES risk is likely to become a negotiation point rather than a purely regulatory issue.

POINTS OF TENSION BETWEEN LANDLORDS AND OCCUPIERS

The interim response does not resolve a number of structural tensions in the MEES regime, including:

• Split incentives – landlords fund improvements, while occupiers benefit from lower energy bills
• Control vs liability – landlords are legally responsible for compliance, but may not fully control building use
• Timing misalignment – lease terms may not align with the 2031 compliance deadline
• Cost recovery disputes – particularly where leases pre-date modern sustainability provisions

These issues are likely to become more pronounced as the EPC B requirement approaches.

KEY TAKEAWAYS

Landlords/investors should look to:

• Begin portfolio-wide EPC assessments and identify assets at risk of non-compliance.
• Develop long-term retrofit strategies, particularly for larger buildings.
• Review lease portfolios to assess cost recovery and cooperation mechanisms.
• Engage early with lenders, investors and occupiers on ESG and compliance strategy.

Occupiers should look to:

• Review leases to understand exposure to upgrade costs and disruption.
• Factor energy performance into property selection and renewal decisions.
• Engage proactively with landlords on improvement plans and cost allocation.
• Align occupational strategy with wider ESG and energy efficiency objectives.

For more information on the proposed MEES reforms and how they may affect your property portfolio, leasing arrangements or investment strategy, please contact Commercial Property partner Vijay Patel.