Mat Lown reviews the latest government plans to make buildings more energy efficient, and outlines how building surveyors can help to achieve this goal.
On 26 March, The Energy Efficiency (Private Rented Property) (England and Wales) Regulations 2015 brought into force the minimum energy efficiency standard (MEES), introduced by the UK government to meet its obligations under the Energy Act 2011.
This is a significant step forward in the drive to make the country’s buildings more energy efficient and to reduce carbon emissions from the property sector. The minimum standard applies to both domestic and non-domestic property from 1 April 2018.
From that date, a landlord will be unable to let an F or G Energy Performance Certificate (EPC) rated commercial property (known as a sub-standard property). The regulations not only apply to lease renewals (where an EPC exists), but also to sub-lettings, capturing tenants who wish to dispose of unwanted space.
From 1 April 2020, the regulations become more onerous by applying to all property leases (where an EPC exists). Initially, the regulations apply to landlords of domestic properties and from 2023, landlords of non-domestic properties must also comply.
Furthermore, the government proposes to review MEES in 2020 and so the standard may tighten.
Some F and G rated properties fall outside of the scope of MEES, including those that are not required to have an EPC under the Energy Performance of Buildings Regulations 2012, for example, listed buildings. In addition, properties with a short lease (defined as less than six months) or with a long lease (greater than 99 years) are excluded.
Exemptions also arise when:
- All cost effective improvements works that have a simple payback period of seven years have been undertaken. These include replacing inefficient mechanical and electrical services installations, fabric improvements and the provision of renewable technologies.
- The Green Deal Golden Rule applies, where the cost of the improvement works exceeds the value of the total energy savings (over a maximum investment period 25 years), i.e. the investment must pay for itself. This only applies when a Green Deal Installer has carried out the improvements.
- A landlord is unable to obtain third party consent for the improvement works, for example from the planning authority, lender, superior landlords, etc.
- An independent surveyor determines that the energy efficiency improvements would devalue the property by more than 5% (such as providing thermal insulation to the internal face of external walls).
If a sub-standard property is sold, the new owner/landlord has only 6 months to comply with the regulations; an important due diligence consideration for prospective purchasers and occupiers.
Exemptions last for 5 years, and to qualify a landlord must register the property on the public Private Rented Sector (PRS) Exemptions Register, stating the reasons in the entry.
The penalties for non-compliance are significant, ranging from £2,000 to £150,000, based on the rateable value of property. Penalties also apply where a landlord has registered false or misleading information on the PRS Exemptions Register. The regulations do not appear to place any limit on the number of penalties that can be issued.
MEES will not be a cause for concern for proactive landlords that recognise the importance of energy performance and have well-established plans in place. However, landlords that do not have a strategy in place or perhaps thought that the regulations would not be introduced could find that they are ‘at risk’ and unable to let properties.
In addition to the loss of rent, they may face significant penalties and as names of landlords in breach of the regulations will be published on the PRS Exemptions Register, potential damage to their reputation.
Finally, the government’s publication of energy performance data allows greater analysis and knowledge of a portfolio’s poor energy performance, which in turn could have a detrimental effect on a company’s or fund’s financial performance.
MEES may well bring a number of softer benefits in terms of meeting corporate social responsibility objectives and helping landlords to differentiate their properties in the marketplace. Well performing, efficient buildings that provide positive environments are proving increasingly popular with occupiers, and such workplaces can play a vitally important role in the battle for talent and staff retention. MEES will provide a tangible benchmark and send positive signals to prospective customers and clients.
What to do?
It is important to assess the risk, identifying any properties that currently have an E, F or G rating. This must include verifying the accuracy of the existing EPCs, because variations in assessments can lead to incorrect ratings. Close attention must be paid to certificates produced shortly after EPCs were introduced in 2008 or where there is a reliance on default settings in the calculation of the rating.
This is particularly important for landlords with domestic properties in their portfolios, because the regulations start to bite from 1 April 2020, shortly after the EPCs prepared in 2008-09 become invalid. Under Part L of the Building Regulations, if certain alterations are undertaken (such as an extension or works to the services), the property must be recertified.
Once the potentially at risk properties have been identified, develop a plan of improvements. To minimise costs, determine what works can be undertaken as part of regular maintenance and refurbishment works. Quite often a rating will be improved by merely carrying out cyclical or planned replacement works at little or no additional cost. In fact, in our experience simply remodelling a property using accurate data can improve the rating without executing any works.
Collaboration with occupiers is essential because it is unlikely that the leases will include provisions for landlords to carry out energy efficiency improvement works in tenanted areas. It is also important that landlords maintain good relationships with their tenants and discuss proposals with them well in advance of any works starting.
The penalties for non-compliance are significant, ranging from £2,000 to £150,000 based on the rateable value of property
When landlords enter into new leases (or renew existing ones), they should consider the inclusion of green lease provisions or attaching a memorandum of understanding to provide flexibility and a framework for collaboration. In addition, it is important that landlords pay closer attention to their tenants’ fit-out proposals to make sure that they do not have a detrimental effect on a property’s EPC.
When evaluating works, consider whether they will have any impact on the value of the property and what consents are needed. It could be that an F or G rated property is exempt and if it is, a landlord must ensure that property is listed on the PRS Exemptions Register, noting that any false or misleading information could incur a penalty.
If there are any concerns about funding improvements works, a Green Deal provider or an alternative funder may be able to help. There are an increasing number of funders specialising in energy efficiency retrofitting.
Finally, when completing due diligence, it is important to make sure that the EPC is reviewed to determine whether the property could be at risk. Where this is the case, determine the cost and timing of the improvement works. This information can be useful for prospective purchasers when re-evaluating their investment appraisals and/or negotiating a purchase price. For occupiers, they should consider whether compliance with MEES might constrain any future plans to sub-let part of the space.
As building surveyors, we have a good breadth of relevant and complementary expertise covering both the technical and non-technical aspects of property and construction. We are particularly knowledgeable in assessing and improving the performance of buildings, skills that are invaluable if we are to meet MEES and to generally reduce carbon emissions from the property sector.
Areas where we can help include:
- When carrying out building surveys for prospective owners and occupiers, consider the potential risks arising from MEES and assess what improvements can be undertaken, with support from specialists where necessary.
- Where risks are evident, help clients to find and appoint a suitably qualified and accredited energy assessor to provide advice on the accuracy of the existing EPCs, potential improvements and the likely optimal rating for the property.
- Consider whether energy efficiency improvements can be undertaken as part of routine and preventative maintenance, repairs and refurbishments; integrate the works in associated documentation (including maintenance programmes, feasibility studies and specifications).
- Help landlords and property owners to implement improvement works, including preparing budget costs and obtaining any necessary statutory consent.
- When reviewing a tenant’s alterations, consider whether the proposed works have any impact on the EPC rating for the property.
- In the context of dilapidations, examine whether MEES has any impact on the claim and for landlords, review whether it would be worthwhile retaining any of a tenant’s alterations that result in a better EPC rating.
Mat Lown, is a Partner and Head of Sustainability at Tuffin Ferraby Taylor.