In order to improve the energy performance of buildings in England and Wales, the Government is consulting on whether commercial properties should be required to achieve a minimum energy efficiency standard equal to an EPC rating of band B by 2030. We have been expecting minimum energy efficiency thresholds to be raised, but were perhaps not expecting the Government’s consultation to raise the bar quite so high, so quickly.
Current position under MEES and the Government’s proposals
Unless certain exemptions apply, the MEES regulations prevent owners of “sub-standard” non-domestic properties from lawfully granting new leases and, from 1 April 2023, will prevent such owners from lawfully continuing to let premises under existing leases. Currently, non-domestic properties are classified as “sub-standard” if they are legally required to have an EPC and that EPC has a rating of below band E.
The consultation proposes that properties should be classed as “sub-standard” if they have either an EPC rating of below band B (the Government’s preferred route) or below band C (its alternative proposal). In both cases, current exemptions would continue to apply, it would remain the case that energy efficiency improvement works would only be required if they met the seven year payback test (broadly, that the expected value of savings on energy bills over a seven year period is equal to or greater than the cost of the measures) and, if a building cannot achieve the required rating, landlords will be able to continue letting their buildings if they can show that the building has reached the highest rating that is possible after undertaking a cost-effective package of measures.
We highlight below some of the key issues raised in the consultation:
Is 2030 is the right date by which the new target should be introduced (question 3)?
Does this give long enough for landlords to plan effectively?
Should the EPC rating be raised to B or C (questions 4 – 6)?
The Government believes that opting for the alternative target of buildings reaching at least an EPC C rating will not deliver sufficient energy and carbon reductions. It considers that, without setting the target at a B rating, the perceived inertia in tackling energy efficiency improvements will continue. However, perhaps the Government expects a backlash, as it asks whether, if it were to opt for the lower EPC C target, there are any other measures that could sit alongside MEES to incentive landlords to take steps to improve their stock to an EPC B, even if this is not strictly required by the MEES regulations.
When should the new target take effect – in a single step or incremental increases (question 8)?
A single step increase would give landlords flexibility to carry out works during an appropriate time in the tenancy cycle, and landlords would only have to demonstrate compliance (or register an exemption) once in 2030. However, the full benefits of energy and carbon reduction would be delayed and, if many put off the task until close to the deadline, there could be a rush in the last year or so which would lead to capacity issues with external assessors.
If the Government were instead to opt for an incremental approach, it sets out examples of how this could work. For the preferred EPC B option, it may look like this:
- In order to grant new leases, premises would require an EPC of D from 2024, an EPC of C from 2026 and an EPC of B from 2028.
- In order to lawfully continue to let premises, premises would require an EPC of D from 2025, an EPC of C from 2028 and an EPC of B from 2030.
Can the shell and core letting problem be resolved (question 10)?
The consultation invites suggestions on whether to (and how) the Government might address the problems that arise when a landlord hands the property to a tenant in a shell and core condition. Where a landlord constructs a new building (or carries out certain types of refurbishment works), it is required to obtain an EPC within five days of completion of the works. In a pre-let situation, where the landlord develops only to shell and core state and leaves it to the tenant to install the core services, such as heating, cooling and ventilation, Government guidance states that the assessor should assume that the property will be fitted out with the most energy intensive services, which is likely to result in a poor EPC rating. If the rating is considered “sub-standard” for MEES purposes, the landlord has a problem – it will generally be required by the agreement for lease to grant the lease, but granting the lease when the building has a sub-standard rating will put the landlord in breach of MEES. Where a landlord is required to grant a lease pursuant to a contractual obligation (e.g. an agreement for lease) it can register an exemption under the MEES regulations but this only lasts for six months. If the fit-out will take the tenant longer than six months the landlord will be in breach of MEES but its tenant will be installing the services (presumably in an energy efficient way) so everyone is expecting a final EPC rating which will not be sub-standard for MEES purposes. It would be helpful if the Government could close this gap so that landlords are not in technical breach of the MEES regulations whilst the tenant’s works are being completed.
Mandatory in-use energy performance ratings
The energy efficiency drive does not stop there. The consultation recognises that EPCs do not reflect value improvements in operational performance of buildings so the Government plans to consult in 2020 on introducing mandatory in-use energy performance ratings for non-domestic buildings.
Responses to the consultation can be submitted online and are required by 7 January 2020, so there is still time to act to ensure your views are 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.