The Minimum Energy Efficiency Standard (MEES), which took effect in April last year, aims to prevent landlords letting properties with a poor EPC rating (currently F or G). It applies to both commercial and residential properties, although there are significant differences in the way in which it applies to each. This article addresses commercial properties only.
By way of reminder, for commercial properties there are currently two dates to keep in mind:
- Since 1 April 2018, before granting a new lease, landlords of properties with an EPC rating below E (called “sub-standard” in the regulations) must carry out energy efficiency improvement works to improve the EPC rating to E or, where appropriate, register an exemption. An exemption can be claimed where works will not pay for themselves (in reduced energy costs) within seven years, using the formula in the MEES regulations. The formula compares the expected value of savings on energy bills over a seven-year period to the cost of the works. Where the test is not met, the landlord can register an exemption, which is valid for five years.
- From 1 April 2023, MEES will apply to all landlords who “continue to let” properties, which in effect brings properties let before 1 April 2018 within MEES. Merely owning a let property with an EPC rating below E will mean that the owner needs to improve the EPC rating to E or register an exemption by 1 April 2023.
Since the MEES regulations are based on EPC ratings, MEES does not apply to a property where there is no EPC (even if an EPC should have been obtained).
Proposals for change
When MEES was first proposed, it was no secret that the original E rating would be reviewed in the future, but this consultation has come earlier than many people expected. It raises two key questions as to how the current E rating should be increased over the coming years against the background of the UK’s commitment to bring all greenhouse gas emissions to net zero by 2050.
The first key question is the level to which the EPC rating should be raised by 2030. Two options are suggested:
- Raise the minimum EPC rating to B by 2030 (the preferred option). Modelling suggests that this would bring 85% of buildings into scope, and would require an investment cost of approximately £5bn between now and 2030. The average payback time on that investment would be four to five years.
- Raise the minimum EPC rating to C by 2030. This would bring only 42% of buildings into scope, and would require a reduced investment cost of £1.5bn. 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. This includes the seven-year payback test mentioned above, so that works would need to be carried out only where they are cost effective.
The modelling suggests that 64% of buildings will be able to reach a B rating, with 20% failing to meet a B rating but able to reach a C rating.
One giant step?
The second key question raised in the consultation is whether it would be desirable to set a single implementation date of 2030 for the new rating, or whether there should be incremental milestones (perhaps D by 2024, C by 2027 and B by 2030, for example). The consultation points out that there are disadvantages of requiring a single jump to a rating of B (or C) by 2030, such as:
- A lower reduction in carbon emissions between now and 2030 than if there were intermediate steps;
- A risk of capacity issues as the 2030 deadline approaches, in terms of both installation of measures and availability of expert advice;
- Possible increased costs to landlords by having to carry out works on more than one occasion; and
- Additional enforcement requirements by local authorities.
One supplementary question raised in the consultation document is whether there would be any way of setting a single date in 2030 by which the B (or C) rating must be met, but incentivising landlords to carry out works earlier than legally necessary. This is a surprising suggestion, given that the only reason that MEES was introduced in the first place is the so-called “split incentive”: landlords have little incentive to carry out works to improve the energy efficiency of a property, given that it will be the tenant that benefits from the lower energy bills.
Furthermore, it seems that landlords cannot be certain that improving a property’s EPC rating will result in a higher rental value.
A further consultation next year
The government has also announced a consultation next year on introducing “mandatory in-use energy performance ratings for non-domestic buildings in the private sector”.
The aim is to help businesses understand and improve the actual energy performance of their buildings. This change may well be achieved by an extension of the requirement for display energy certificates. These are currently mandatory only for larger buildings occupied by a public authority and visited frequently by members of the public. They are, however, often commissioned voluntarily in privately occupied buildings as well, and perhaps this will become a new mandatory requirement.
- The consultation is available here. The last date for responding to it is 7 January 2020.
Angus Evers is a partner in the planning and environmental team and Peter Williams is assistant head of knowledge management at Shoosmiths LLP
