COMMENT We are now less than 200 days from the UK’s first-ever Minimum Energy Efficiency Standard deadline (MEES), and more than 10% of leased commercial properties are expected to fall short of the mark.
What’s more, for landlords who manage to meet April’s deadline, the race for energy efficiency does not end there. By 2030, all properties will need an EPC rating of B or above (a criteria currently only met by 12% of all registered non-domestic properties) meaning that in the next eight years, 88% of the country’s non-domestic properties will need to drastically upgrade their energy performance. Over half a million assets will need to be upgraded by multiple ratings, or landlords risk being saddled with stranded properties. No easy feat.
Those landlords who have not yet begun their upgrades have likely let regulations sit on the backburner while scrambling to recover from the recent economic blows of Covid and ensuing closures and supply chain issues. This is understandable, but these landlords might not have expected that the economic landscape is only set to worsen as we wait for a bitter winter to whistle through. Soaring inflation underpinned by unprecedented electricity and gas rates are causing budgets to tighten as the cost of running a property is set to rise, but landlords must be live to the fact that investing now will pay welcome dividends further down the line.
Reorganising priorities
The worrisome economic outlook of the past two years has pushed landlords into survival mode. Understandably, property owners have prioritised low costs and happy tenants over the need to keep up with regulation. However, many landlords have now fallen behind the regulatory curve and non-compliance is simply not an option. The costs of non-compliance can be devastating, with penalties for leasing a property that is in breach of the MEES regulations set to be the equivalent of 10% of the property’s rateable value, subject to a minimum penalty of £5,000 and a maximum of £50,000. After three months, this increases further and the penalty rises to 20% of the rateable value, with a minimum penalty of £10,000 and a maximum of £150,000.
With such a large proportion of landlords looking unlikely to fork out large sums to meet the looming deadline due to an impending recession, it is valid to question whether the government should extend the deadlines. However, the tides have already turned and short-term relief will not stop the great short-falling that is already in motion. Measures such as the seven-year payback exemption have been drafted within the regulations to limit
the financial burden, and landlords need to avoid kicking the can down the road any further.
MEES is not going away, and by acting now, property owners and occupiers will have sufficient time to identify, finance and implement the required projects to achieve MEES compliance. There are no quick wins. In most cases, complying with future and current MEES will require re-assessment of EPC ratings now for properties that may have EPCs in place for years to come. It is important to remember that. Landlords may be reluctant to part with budget at the moment, but the benefits of acting now are clear. Detailed preparation and implementation will result in better-performing properties that are cost effective and sustainable to operate, which benefits all parties concerned and works towards the common goal of net zero carbon by 2050.
Putting the ‘E’ in ESG
While improving a building’s EPC will understandably be viewed as a burden by many, landlords should also be encouraged by the opportunities that it presents. With ESG currently the acronym on everyone’s lips, sustainable building credentials have been pushed to the top of boardroom agendas and occupiers are looking for buildings that meet higher environmental standards. At the same time, choosing a new HQ is a costs exercise, businesses are always thinking about their own bottom line, and by improving a building’s EPC rating landlords can offer lower running costs, by reducing energy and electricity bills.
What’s more, the bottom line of the matter is that improving the UK’s overall EPC rating is paramount to achieving net zero by 2050. However, for this to be achieved, there must be a change in behaviour from both property owners and occupiers. The introduction of new schemes, such as green leases for new lettings and memorandums of understanding (MoU) for existing leases are a sensible way to encourage co-operation between parties and share responsibility of property environmental performance. Yet, we need to see cooperation go further. We all know a problem shared is a problem halved.
Climate crisis
The UK’s lasting impression of this summer will no doubt be the record temperatures that caused wildfires, disrupted transport and plunged the country into drought. Hopefully, a wake-up call to those who needed it.
We must realise that we are in the grips of a climate change catastrophe with rising temperatures further straining natural resources. If drastic action is not taken now, the country will see national disruption on a growing scale, such as black-outs and transport network failures.
These issues will only result in further economic hardship and create an even stronger cycle where tight budgets prevent landlords from investing in upgrades that would make running their properties cheaper in the long run. Compliance with sustainability legislation will only become more difficult to implement and fund if landlords don’t take action now and work collaboratively with occupiers.
Stuart Funiciello is a partner in Hartnell Taylor Cook
