Ten years ago Aldersgate Group published a report calling for “Better Regulation for a Sustainable Built Environment”. It identified that the UK’s existing building stock was the source of much of the country’s carbon emissions; 27% for residential properties alone. It was clear then that very substantial reductions in the carbon emissions from buildings would have to be achieved to deliver the Government’s target to reduce UK emissions by 80% by 2050. Since then the UK has made considerable progress in reducing its overall carbon emissions. The UK Greenhouse Gas Emissions data for 2017 were published recently and show that total emissions have reduced by 43% since 1990 and are now at levels not seen since 1890! However, whilst this is a considerable achievement, the Committee on Climate Change concluded in 2015 that emissions from the buildings sector were set to flatline for the next 20 years without additional policy measures.
Minimum Energy Efficiency Standards (MEES)
The good news is that one of the core recommendations of the 2008 Aldersgate report has now been implemented. From 1st April it has become illegal for landlords in England and Wales to agree a new lease for the least energy efficient properties; both residential and commercial. Property owners and landlords already had a legal obligation to provide an Energy Performance Certificate (EPC) to prospective purchasers or tenants. EPCs rate the energy performance of the property on a scale from A to G; with A representing the most energy efficient and G the least efficient. The hope was that better market information would drive purchasers and tenants to demand more energy efficient buildings. In practice it has had limited impact to date but that is set to change.
Regulations came into force on 1st April which set the Minimum Energy Efficiency Standard (MEES) at an EPC rating of E, meaning any property with an EPC rating of F or G may not be lettable from now on. Government figures suggest that this could affect more than 100,000 commercial lettings and up to 1 million residential properties. All of these properties must be brought up to the minimum standard of an E rating before they can be let to a new tenant or even let under a new lease to an existing tenant.
There will be some exemptions. For example, commercial property landlords are only obliged to implement improvements that pay for themselves within 7 years. For residential properties, the Government has recently consulted on proposals to cap the money that landlords are required to spend on energy efficiency improvement at £2,500 per property. Critically “do nothing” is not an option. Landlords will either have to improve poorly performing buildings until the EPC rating is at least an E or register an exemption and justify it with supporting evidence.
Challenges to implementing MEES
The regulations aren’t perfect. Arguably they would have a greater impact if they were based on the operational energy performance of buildings rather than a more theoretical “design” performance. In some places the regulations and the supporting guidance are unclear about what is actually required, such as the requirements for listed buildings. And in other cases, the regulations are at odds with how the property sector operates in the UK. For example, in many cases an EPC cannot be produced for a property until the tenant has completed their fit out. But in most cases the tenant cannot take possession of the property to undertake their fit out until the lease is agreed. But the regulations require an EPC be prepared (with a minimum E rating) before the lease can be agreed.
These issues are real and will be the subject of much debate in the coming months. However, people shouldn’t allow that noise to let them underestimate the significance of the introduction of Minimum Energy Efficient Standards. The Government has signalled its intent by allowing for significant financial penalties, up to £150,000 for commercial properties. The impact is already being felt in the market as well with some institutional investors reluctant to invest in or hold “sub-standard” F or G rated assets. Surveyors and managing agents are predicting lots of tough negotiations around rent reviews and dilapidations claim at the end of leases for poorly rated assets. And this is just the start. At the moment the MEES requirements only apply to new leases. From 1st April 2020 for residential and from 1st April 2023 for commercial properties, these requirements will apply to all existing leases as well; unless they are very short or very long. The Government has also made clear its intentions to tighten the standard over time. It has already stated its long term aim for the minimum standard to be a C rating for residential properties by 2030. In the shorter term, the Government is planning public consultations on both Minimum Energy Efficiency Standards and Part L Building Regulations within the next 12 months.
The direction of travel is clear … and welcome. The MEES requirements have the potential to drive much needed improvements in our existing building stock. However all those investing in, owning, leasing and managing rented property need to fully understand the requirements and their implications so they can seize the opportunities protect and enhance value and manage the commercial and compliance risks effectively. If you want to find out more, WSP has produced a MEES Toolkit to help people understand the requirements and how to ensure their buildings meet the new standards.
Simon Clouston is Technical Director at WSP