Dilapidations and MEES

Tenants facing dilapidations claims are now using MEES as a bargaining tool to reduce their landlord’s claim.

Unless there is particularly clear wording in the lease, a covenant to comply with statutes is unlikely to have the effect of requiring the tenant to carry out relevant energy efficiency improvements so as to increase the EPC rating of the premises

Where a landlord’s claim has been prepared without due understanding of what the outcome EPC rating would be of the ‘yielded up’ property requested back, tenants may be successful in arguing that the subject property would be ‘sub-standard’ and thus the value and validity of the dilapidations works requested would be questioned.

The concern for the landlord here is that well-advised tenants will leave properties at lease-end with a sub-standard EPC rating, with no dilapidations works completed and a reasoned argument to contribute nothing even if the landlord subsequently does the work.

Demonstrating that there is disrepair is essential in dilapidations claims. In terms of M&E services, this can be an expensive and time-consuming process and may require specialist validation. If the only method of repair is renewal, then there should be no issue with using the modern equivalent of the installations originally demised.

It is well established that a landlord cannot recover damages from a tenant for a breach of repairing covenants where the repairs will be rendered valueless by works the landlord will do to the premises after the expiry of the lease. This is known as supersession.

If the landlord needs to carry out works in order to improve the EPC rating of the building following lease expiry, then unless those works would otherwise have qualified as “repair” or are only necessary due to a breach of covenant by the tenant, then the cost of carrying out such works is unlikely to be recoverable.

As such replacements would also need to comply with the current Building Regulations in addition to any other applicable standards and legislation, almost always improving the EPC rating with no cost uplift.

During our EPC and MEES work the single biggest issue that we encounter is a strained relationship between the tenant and landlord. This situation tends to get worse, the larger the property portfolio or individual property (or tenant) with both trying to use the EPC rating to their advantage.

A tenant may argue that it is their fit out that has produced a good scoring EPC rating which would become sub-standard at dilaps with the landlord arguing the opposite.

Tenants of premises with a valid EPC rated less than E will inevitably also argue that the landlord’s dilapidations claim should not include works which will be superseded by works the landlord has to undertake in order to re-let in compliance with the MEES regulations.

A tenant will argue it should not be liable to repair anything which the landlord is going to have to replace in order to improve the EPC rating of the property so that it can be re-let lawfully. Plus whilst a tenant is obliged to leave the building in a good condition, it is not their responsibility to ensure it acts in accordance with MEES, especially if it was not compliant in the first place. Consequently, there is no obligation to upgrade a property, rather, it simply prevents non-compliant property from being leased.

Furthermore, the tenant’s duty to ensure that the building is up to scratch following the tenancy can be superseded by any works that the landlord might need to carry out in order to achieve the right level of energy efficiency. So, for example, if the air-conditioning system in an office building needed replacing to achieve a band E rating, then there would be very little point in the tenant carrying out repairs under dilapidations to services if they were likely to be ripped out once the landlord began the necessary upgrading works. For this reason, the landlord would not have suffered financial loss due to dilapidations, so there would be no claim.

Where a property requires improvement to reach a minimum EPC E rating, there may be different ways to achieve this. The landlord will want to elect which of the inefficient features of the building it chooses to improve and will not want its hands tied by the tenant’s desire to minimise the dilapidations claim. 

Therefore, the landlord needs to be forearmed with advice from an EPC assessor on the most cost-effective means of improving the EPC rating in the face of such claims. Similarly, tenants who could make significant savings on dilapidations will also be looking to EPC assessors to advise where the necessary improvements need to be made.

At MEES Solutions, we offer a building model-for-life, this benefits both tenant and landlord providing transparency of a property’s journey from vacancy, to fit out, and subsequent dilaps.

With the ever tightening of energy regulations and compliance, the importance of real time accurate property information becomes of paramount importance to both landlord and tenant during dilapidations (and even lease renewal) negotiations.

Increasingly MEES Solutions are being asked to work for either landlord or tenant against the other when the simple solution may just be a collaborative lease that serves both parties (and saves the planet) from the start. Having a MEES Solutions “Model for life” would provide an instant overview of the impact of the tenant fit out on the EPC rating.

Similarly, the best way to mitigate liability in new leases is to draft leases taking MEES into account.  Landlords and tenants should be looking very closely at the wording of the repair, reinstatement, service charge and other obligations in their leases to establish who should pay for MEES improvements.

What’s perhaps most important is that people understand that this is not another string to a landlord’s proverbial bow. However, tenants need to make sure that they are properly advised to make sure that they are not paying for something for which they have no liability.