Although estimates vary, it's widely acknowledged that the UK's built environment accounts for a large proportion of our carbon emissions, some 25 – 30%. What is clear is that, unless action is taken, this proportion will grow as other sectors become more successful in decarbonising.
Sustainability should be considered at all stages of new builds (including sustainable construction, development, and energy generation), but the end user – the owners and occupiers of existing buildings – must also play their part. The simple way of achieving this is by driving energy efficiency, and this is why the Minimum Energy Efficiency Standards (MEES) are a key part of government strategy.
We are no doubt all familiar with Energy Performance Certificates (EPC) and the current standards which consider an EPC rating below band E to be sub-standard. Under the regulations, it is unlawful to let a sub-standard property and unlawful to continue to let a sub-standard residential property. The continued letting provision is being extended to commercial buildings from 1 April 2023, subject to certain transition arrangements and exceptions
While the direction of travel is certain, the pace of the proposed change is not. In 2020 the Department for Business, Energy and Industrial Strategy (BEIS) launched a consultation on increasing the benchmark for private rented homes to EPC band C by 2030. In 2021, the government published a further consultation on proposals to increase the EPC requirements for non-domestic rented properties to band B by 2030. However, take note - this comes with an interim milestone of improving stock to band C by 2027.
While neither of these consultations have reported yet, the current focus on the energy crisis, climate emergency and poor quality of some rented residential properties is unlikely to give the government any incentive to row back from the proposals.
What that might mean is that around 85% of the current stock of commercial property would be brought into non-compliance with the regime. This is a staggering amount, and the effects will be felt by virtually every commercial landlord outside of new build stock. While the exceptions include a 'payback test' to limit the cost of works which must be undertaken, the high price of energy means this could be of limited comfort to those with interests in inefficient properties or with large portfolios.
Given an impending economic slowdown and cost of living crisis, the government may find itself with a plateful of more pressing matters to deal with so any new MEES regulations get pushed down the running order. However, it would be very wise for investors and lenders to keep a close eye on developments this area; 2030 is not far off, and 2027 is within five years, the term of a typical commercial real estate loan. Thinking about EPCs now might not be as far sighted as it seems.