UK: Minimum Energy Efficiency Standards

Summary and implications

Blink and you would have missed it. Over the summer the Department of Energy and Climate Change (DECC) issued its long-awaited consultation on minimum energy efficiency standards (MEES). The six-week consultation period officially closed on 2 September 2014.

What's the issue?

Virtually all types of building consume energy. That puts UK real estate squarely in the Government's sights for energy efficiency and reduction measures. Enabling legislation (section 49 of the Energy Act 2011) was passed in 2011. This requires ministers to put in place regulations which would make it unlawful by 1 April 2018 to let non-domestic property which falls below a certain level of energy efficiency, unless the owner has carried out relevant energy efficiency improvements.

"E"s are good

Many property owners and occupiers will already be familiar with energy performance certificates (EPCs). EPCs include the colourful bar charts which illustrate a building's energy efficiency on a scale of "A" to "G". In line with previous announcements and industry expectations, the consultation document confirms that the required MEES will initially be an E rating. However, the consultation also reminds readers that:

Commencement and forward planning

Although the regulations must be made by 1 April 2018, the Government's preferred approach is that until 1 April 2023 they will only apply to new lettings. However, after that date all lettings, including existing leases, would be caught unless an exemption applies. The Government has also sought views from consultees about whether it would be helpful to commit to a "forward trajectory" so that property owners know in advance when the MEES will next be increased and can plan accordingly.

Relevant improvements

If a property falls below the relevant MEES, the landlord will have to carry out relevant improvements before it can be let. Almost 1 in 5 non-domestic properties (18 per cent) are currently rated "F" or "G", and therefore could become unlettable when the regulations come into effect.

Landlords will still be able to comply with the law if they have carried out "relevant energy efficiency improvements". These improvements will be those works which are prescribed in the regulations, and which can be entirely funded by a "green deal" financing plan (or such equivalent financing plan as the regulations specify). The "Green Deal" is the Government's flagship environmental policy which is intended to allow property owners to fund environmental improvements at no up-front cost. Instead, the cost is recouped over a period of time through the energy bill. The "golden rule" of green deal funding is that the estimated savings on energy bills must always equal or exceed the cost of the works.

However, DECC recognises that no green deal finance has yet been made available to the commercial sector. Furthermore, even if it becomes available before 2018 many property owners may not wish to use it (for example, because they have their own more competitive sources of finance). The consultation document therefore asked readers whether landlords should be able to comply by installing energy efficiency measures which fall within a maximum payback period, and sought views as what payback period would be appropriate.

Scope

The consultation proposes that only those buildings which are required to have an EPC should be "within scope" for the purposes of MEES. This seems a sensible starting point but is complicated by the continuing uncertainties around which buildings do and don't require EPCs. The Government has also sought views about whether to exclude very short lettings (of up to six months) and long leases (of more than 99 years).

Exemptions

A landlord may not be free to carry out relevant energy efficiency improvements because third party consents are required – for example, the landlord may need to obtain planning permission for the works, or the consent of a mortgagee or occupational tenant. Where this is the case, the consultation suggests that the landlord must use best endeavours to obtain the relevant consent and retain evidence of its efforts. If consent is not given or is made subject to unreasonable conditions, the landlord will not be obliged to carry out the improvement works.

A "devaluation exemption" is also proposed. This would apply if the landlord can prove that the required works would reduce the value of the property, for example by reducing the useable area.

However, the exemptions will not last forever. The consultation proposes a maximum period of five years, after which the landlord must either demonstrate that the reasons for the exemption (such as a refusal of consent) still apply, or carry out the works.

Enforcement

MEES will be enforced by Trading Standards Officers, who are already responsible for enforcement of EPCs. Only landlords will be liable for failure to comply with MEES – it will be unlawful for a landlord to grant a lease but not for a tenant to take a lease of a non-compliant building. The consultation asked for views about the levels of penalty to be imposed, as well as more administrative issues such as the correct forum for appeals.

Evidence

An underlying theme throughout the consultation is that landlords will have to maintain adequate records. They will need to be able to demonstrate (not only to the enforcement authorities but also to purchasers, funders and tenants) whether or not a property is outside the scope of the regulations or is exempt, what steps have been taken to obtain any necessary consents and what improvement works have been carried out. The regulations are likely to generate a whole new category of due diligence in real estate transactions.

What next?

The Government intends to issue the regulations by the beginning of 2015 "to provide certainty and clarity to the market". However, it would be unwise to wait. In asset management terms 2018 is no distance away so landlords should:

• carry out an audit. How many buildings in your portfolio have EPC ratings below an "E"?
• get a second opinion. Is the current EPC rating robust, or does it need updating?
• use void periods to carry out improvement works. Even in the best managed properties, there are likely to be opportunities to reduce energy consumption;
• raise awareness. Tell your contacts and peers about MEESs;
• join a support group – organisations such as the British Property Federation (http://www.bpf.org.uk/en/what_we_do/sustainability/green_deal.php) and the Royal Institution of Chartered Surveyors (http://www.rics.org/uk/) will continue to engage with DECC. Although the consultation period has ended, there should still be opportunities to mitigate the impact of MEESs – but only if the property industry makes its voice heard.

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.