UK: Minimum Energy Standards – One Step Closer To Implementation

Last Updated: 6 August 2014
Article by Jon Lovell

Most Read Contributor in UK, August 2017

The Energy Act 2011 places a duty on the Secretary of State for Energy & Climate Change to bring forth regulations to improve the energy efficiency of private rented buildings in both the domestic and non-domestic sectors in England and Wales. The Regulations must be in force by 1 April 2018, and will require all eligible properties to be improved to a Minimum Energy Standard.

The prospect of such a statutory restriction on the trading of property has prompted significant debate across the industry. Indeed, the concept of regulating Minimum Energy Standards for leased premises has arguably captured more attention in the market than any other policy instrument relating to the energy or carbon impact of buildings.

Given the potential impact of Minimum Energy Standards on both investment and occupational interests, recent months have witnessed ever strengthening calls from across the industry for clarity from Government on the proposed detail of the prospective Regulations. Those calls have, to an extent, been answered now that the Department of Energy & Climate Change has published its consultation on the intended scope of Regulations.

Those who read the consultation document in full will almost certainly find a number of their questions about the detail of Minimum Energy Standards unanswered. Moreover, some of the specific proposals contained in the consultation raise further questions about the practicalities of implementing the Regulations; in this regard, the level of resourcing available for effective enforcement is perhaps the issue of greatest significance.

Perhaps one of the most debatable elements of the consultation is that relating to the cost effectiveness tests for compliance. Whilst two options are effectively on the table, the intonation of the document leans heavily towards the Golden Rule - the as yet undefined financial test to be applied to the non-domestic Green Deal. This comes at a time when the efficacy and viability of the non-domestic Green Deal has never been more in question.

All that said, the publication of the consultation, and the strong indication from the Department of Energy & Climate Change that it wishes to continue strong and positive engagement with the industry to achieve the most effective outcome possible, is to be welcomed.

Certainly, the advice we have been giving to property owners and occupiers since the Energy Act came into effect in 2011 has been reinforced by the consultation. In particular, it brings into even sharper focus the need to consider the risks and value enhancement opportunities afforded by Minimum Energy Standards through capital allocation strategies, investment appraisals, lease negotiations and rent reviews, asset strategies and business plans. Landlords and lessees that have yet to determine the potential timing and magnitude of their risk exposure should certainly begin to do so now.

The headlines of the consultation for non-domestic buildings are as follows:

  • As widely expected, the Minimum Energy Standard will be an E-rating with reference to the Energy Performance Certificate (EPC).
  •  Minimum Energy Standards will be introduced from 1 April 2018, but there are three options presented for the manner and scope by which they could be commenced:
    • A soft introduction, where the restrictions on letting properties with an F or G rating would apply only to new leases granted on or after 1 April 2018.
    • A hard introduction, where the Minimum Energy Standard would be applied to all leased premises within scope from 1 April 2018, thereby requiring retrospective improvements to properties that are already let.
    • A phased introduction, where the regulations apply to new leases from 1 April 2018, but with a hard 'backstop' applying the requirements to all leases. There is a clear indication that this is the Government's preferred option, and a backstop date of 2023 is suggested.
  • Non-domestic buildings which are let under a tenancy in England & Wales will be within the scope of the Regulations if there is already a requirement under the Energy Performance of Buildings Directive (England and Wales) Regulations 2012 for those buildings to have an EPC. The consultation indicates that if an EPC has been obtained for a property voluntarily, then that property would be exempted from Minimum Energy Standards requirements. There is, however, a suggestion that such an exemption might not apply in the event of a hard start to the Regulations.
  • Lettings which currently require an EPC will also trigger a requirement to meet the minimum standard, albeit that Government is seeking views on whether leases exceeding 99 years in length would be exempted, as well as those of six months or less. The consultation seeks particular views on whether the Minimum Energy Standards should apply to lease renewals, which in turn prompts further questions about the interface of the Regulations with the 1954 Act.
  • There are several exemptions proposed, with such exemptions expiring after five years or where an earlier event deems the original exemption obsolete. Situations to which exemptions would apply include where:
    • compliance with the Regulations would lead to a 'material' devaluation of the property in the judgment of an independent valuer;
    • consent from whosoever it might be required to implement energy efficiency improvements is not forthcoming, assuming best endeavours have been made to secure such consent and that these are documented; or
    • consent is granted but on the basis of unreasonable condition(s), a matter which may well need to be tested through the Courts.
  • The prospect is raised of introducing a longer-term trajectory, whereby the Minimum Energy Standard is ratcheted upwards to a higher EPC rating over time.

  • Enforcement is to be via local Trading Standards Officers.
  • The consultation proposes that a property which has undertaken all improvements which meet the Golden Rule can continue to be let, even if the EPC remains below an E rating following the exhaustion of those eligible works. As an alternative to the Golden Rule, the Government is also consulting on the prospect of applying a simpler time-bound payback period as the financial test for compliance. 

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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