Buildings are responsible for around 31% of carbon emissions in the UK. Reducing the energy consumption of buildings is therefore a key priority in the race to achieve net-zero emissions by 2050.
Since 1 April 2018, the Minimum Energy Efficiency Standards (MEES) have required commercial properties in England and Wales to have a minimum EPC rating of E before they can be let on a new tenancy. This requirement does not yet affect existing leases, but that is about to change. From 1 April 2023, it will be unlawful for a landlord to continue to let a commercial property with a sub-standard rating, unless a valid exemption has been registered.
How will this change impact landlords?
Most commercial landlords will already have had to address MEES when granting new leases, but with a new lease the landlord is in control and has time to prepare, so it can make appropriate energy efficiency improvements and/or register an exemption before the lease is granted. That will not be the case when the minimum energy efficiency requirement applies to existing leases from 1 April. Landlords must therefore act now to assess the position for all their current leases and take any necessary action if they have not already done so. Time is running out.
What should landlords do now?
Landlords urgently need to assess their portfolios and review the EPC position on all existing leases, particularly those granted before 1 April 2018. Where the EPC rating is lower than E, the landlord needs to carry out any relevant energy efficiency improvements and/or register a valid exemption before 1 April in order to avoid being in breach of MEES. Broadly speaking, relevant improvements are those that will achieve an energy efficiency payback within seven years.
Where the current EPC rating is lower than E, the landlord might choose to commission a new EPC with the aim of achieving a better rating (for example, where works to improve energy efficiency have been carried out since the current EPC was produced).
What exemptions are available?
- New landlord exemption - on acquiring a substandard property which is already let, the new landlord has six months to carry out all relevant improvements and, if the property is still sub-standard once all relevant improvements have been carried out, register another valid exemption.
- Consent exemption - this is available where the landlord has not been able to improve the energy performance to the minimum standard because consent is required from the tenant and/or a third party and the landlord has been unable to obtain that consent.
- Devaluation exemption - this is available where the landlord has not made the relevant improvements because it has obtained a report by an independent surveyor that making the relevant energy efficiency improvements would result in a reduction of 5% or more in the market value of the property.
- All relevant improvements have been made and the property remains sub-standard, or there are no relevant improvements which can be made - in both these circumstances the landlord can register the required information and an exemption will then apply.
All the exemptions last for five years, except for the new landlord exemption which only lasts for six months.
An exemption can only be relied on where the landlord has provided details and evidence of the exemption to a centralised self-certification register called the PRS Exemptions Register. Once an exemption has been registered the landlord needs to monitor it and re-assess the position before the exemption expires.
Consequences of non-compliance
Enforcement of MEES is the responsibility of the local weights and measures authority (part of Trading Standards).
Where a property continues to be let in breach of MEES, the lease remains valid but the landlord risks penalties. For commercial property where the breach lasts for three months or more the maximum financial penalty is £10,000 or 20% of the rateable value (whichever is the higher), up to a maximum of £150,000. This could quickly add up on a multi-let property.
A so-called "publication penalty" can be imposed in addition to or instead of a financial penalty, and this involves details of the breach being entered on the publicly accessible part of the PRS Exemptions Register. It goes without saying that this could result in unwelcome negative publicity for the landlord.
Will the minimum energy efficiency standard increase?
Almost certainly. The MEES requirements look set to be tightened significantly in the fairly near future. In a 2019 consultation, the government proposed that the minimum energy efficiency standard should increase to EPC band B by 2030, with the possibility of phased implementation requiring band C by 2028. While the outcome of that consultation is not yet known, the government's target of net-zero emissions by 2050 means the direction of travel on MEES is clear.
Landlords who have not already addressed MEES must do so urgently, to avoid the risk of financial penalties and reputational damage. Investing in energy efficiency improvements inevitably has cost implications, but it also brings obvious environmental benefits and will likely pay dividends for landlords in the long run. Landlords are having to cut asking rents on office buildings with poor energy efficiency ratings by as much as 10% to attract tenants, according to new figures from Carter Jonas quoted in EG recently. Tenants will increasingly shun or leave sub-standard properties, something which the rise in energy costs has only accelerated.
This article is part of Womble Bond Dickinson’s Growing Global series. For more insights, click here to visit our Growing Global hub.