Reasons to choose Wilson Browne
The government is consulting on a proposal to raise the Minimum Energy Efficiency Standard (MEES) for let commercial buildings (referred to as non-domestic private rented buildings).
The government’s favoured approach is raising the minimum EPC rating to B by 1 April 2030, provided the measures required to meet this are cost effective. The announcement comes as part of the government’s package of measures to reduce carbon emissions as it has committed to support businesses in reducing their energy use by at least 20% by 2030. It is part of the UK’s commitment to bring all greenhouse gas emissions to net zero by 2050.
Since 1 April 2018, the Energy Efficiency (Private Rented Property) (England and Wales) Regulations 2015 (MEES Regulations) have made it unlawful for landlords to grant a new tenancy of a property with an EPC rating of below E (known as a sub-standard property), unless an exemption applies and has been validly registered. From 1 April 2023, it will be unlawful for a landlord of sub-standard commercial premises to continue to let those premises unless an exemption applies and has been validly registered.
The consultation is seeking views on two potential options:
- The preferred option is to raise the minimum EPC rating from E to B so that all non-domestic privately rented buildings achieve a minimum energy efficiency standard of EPC B by 1 April 2030, provided the measure or package of measures required to reach an EPC B prove cost effective. The government’s modelling suggests that this would bring 85% of buildings into scope and would require an investment cost of approximately £5 billion between now and 2030. The average payback time on that investment would be four to five years.
- The alternative option is to raise the minimum EPC rating from E to C so that all non-domestic privately rented buildings reach an EPC C by 1 April 2030 if cost effective. This would bring only 42% of buildings into scope and would require a reduced investment cost of £1.5 billion. The average payback time on that investment would be three years.
Whichever option is adopted, it is proposed that the existing exemptions would continue to apply. The most important of these is that landlords are only required to carry out works that are cost-effective, meaning that the measure achieves a payback of seven years or less. This test is met if the expected value of savings on energy bills over a seven-year period is equal to or greater than the cost of the measure. If this test is not met, landlords are able to register an exemption that is valid for five years.
The consultation provides two options for implementing the tighter MEES requirement:
- The first option is to have a gradual increase of the standard until it reaches, for example, a D by 2024, C by 2027 and B by 2030. The objective here is to seek early action by landlords and obtain a greater positive impact on carbon and energy savings;
- The second option is a single implementation date of 2030, by which time landlords need to meet a rating of B (or C).
It is likely that a large number of landlords would need to register exemptions given the percentage of building stock that would be affected by the increase in the minimum requirement to a B or C rating.
Issues as between landlord and tenants already arise n relation to MEES:
- the landlord may have carry out work to bring the premises up to the required EPC rating before granting the lease. If the landlord has to spend money to improve the premises to the required level, it is likely to pass this expenditure on to the tenant by way of an increased rent. The government anticipates that landlords will recoup their costs through enhanced rental values that reflect better buildings with lower outgoings and through increased property values, but acknowledges that has not really happened to date;
- the tenant’s fit out could reduce the EPC rating of the premises, putting the landlord at risk of breaching the prohibition on continuing to let a sub-standard property. This is already acknowledged as a problem in the market and is likely to become more widespread when the minimum rating is increased.
The consultation seeks views on how the market can overcome situations where the tenant has fit-out requirements and is willing to fund the improvement of the building at the start of the tenancy.
The consultation runs until 7 January 2020. Responses should be submitted online. Those involved in the real estate, construction and energy sectors may be interested to respond