CO2 Estates – Maximising Real Estate Performance

MEES: The implications for rent reviews, lease renewals and valuation

Date: 28th November 2016

We are pleased to provide you with a copy of our unique research on the potential effects of MEES on rent reviews and statutory lease renewals, and the knock-on effects of this on commercial property values. The research is unique as for the first time arbitrators and solicitors have been engaged to identify and quantify valuation risk using a realistic case study building and lease. The paper has been prepared by our Director of Engineering and Asset Management, Andrew Cooper, and Head of Product Development, Dr Megan Strachan.  It has been peer reviewed by market experts including Dr Paul McNamara, a former Director and Head of Research at PRUPIM (now M&G Real Estate).

The findings

  • We find that the risks implied by MEES are real. Valuers will be able to develop highly polarised arguments in rent negotiations depending on whether they are appointed by the landlord or the tenant. Our detailed case study suggests the possible effect of MEES regulations on value ranges from a sum slightly in excess of the cost of relevant energy efficiency improvements, to one considerably in excess of the cost of relevant energy efficiency improvements, leading to a reduction of over 10% in the building’s capital value.
  • It is unlikely that leases ‘inside’ the 1954 Act[1] will escape any impact on value from MEES. However, the main impacts on value will tend to follow statutory lease renewals. Leases inside, or indeed, outside of the 1954 Act might only be affected at rent reviews if transactional evidence proves the existence of a rental discount.
  • Central to this debate on value impacts are the typical lease covenants relating to the hypothetical letting, and the provisions of section 34 of the 1954 Act.
  • The regulations place a great deal of importance on the EPC. As such, holding an inaccurate EPC could have serious and expensive consequences for a landlord.
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