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MEES screws tightening on commercial landlords

The recent Government Consultation on the Minimum Energy Efficiency Standards (MEES) sets even more ambitious targets for lettings of commercial properties than previously expected by proposing an increase from the current minimum EPC rating of E to a C or even B rating by 2030. This new proposed trajectory as a stepping stone to achieving net zero carbon by 2050 will have a big impact for many landlords and investors despite the long lead time for the changes to be introduced.

It is now more than eighteen months since MEES came into force setting out the minimum level of energy efficiency for both commercial and residential privately rented property in England and Wales. Since 1 April 2018, landlords have not been able to rent out commercial properties with an EPC rating below E unless improvement works are carried out or an exemption can be claimed and registered. From 2023 these rules will also apply to all existing leases of non-domestic properties.

Find out more about the MEES regulations: which premises are caught; exemptions; sanctions and enforcement and the impact on landlords, tenants and lenders. 

Despite lack of enforcement by Local Authorities, evidence suggests that the regulations do seem to have had a substantial impact on new EPC registrations where ratings have significantly improved: A-rated certificates have increased from pre-MEES levels and there has been a steady fall in the percentage of F and G-rated certificates (from 10% in 2017 to 5% in 2018). London has seen the greatest decrease in these low-rated certificates. All of this is of course good news for the Government in delivering energy savings to support its commitment to bring all greenhouse gas emissions to net zero by 2050. But F and G rated buildings only account for 20% of non-domestic premises in the UK so there is certainly scope for further improvements in energy savings. So…what does the future hold for MEES and what do landlords and investors of commercial premises need to be aware of? 

Proposed changes to minimum EPC ratings by 2030

The Consultation Paper was published on 15 October 2019 and puts forward two options for tightening MEES standards for commercial properties:

  • raise the minimum EPC rating to B by 2030 – this is the Government’s preferred option and would require an investment cost of approximately £5bn between now and 2030 with an average payback time of between four and five years bringing 85% of buildings into scope;
  • raise the minimum EPC rating to C by 2030 – this would only bring 42% of buildings into scope and would require a reduced investment cost of £1.5bn and an average payback time on that investment of three years.

Existing exemptions will continue to apply including the seven-year payback test whereby a landlord may still let the premises if the recommended energy improvements do not pay for themselves in energy savings over a seven-year period. 

Phased introduction or single jump

A key focus of the Consultation Paper is how these changes should be introduced and whether this should be on an incremental basis with one or more phased increases in the 2020s or a single increase in 2030. Key advantages and disadvantages of a single jump from E to B or C are outlined in the Consultation:

  • lower reduction in carbon emissions between now and 2030 than if landlords had to take steps immediately;
  • a risk of capacity issues as the 2030 deadline approaches both in terms of carrying out works and availability of expert advice;
  • increased costs to landlords in having to carry out works on more than one occasion.

The Consultation also seeks views on how enforcement of MEES can be improved and the additional enforcement requirements by local authorities.

Whilst the stated policy objective of businesses reducing their energy use by at least 20% by 2030 is to be applauded, it remains to be seen whether this is achievable and whether these proposals will turn the screws on landlords too quickly and too tightly. Time-limited exemptions such as the payback test are likely to gain in importance and it will be interesting to see how many of these and other exemptions are being registered in the run-up to 2030.

Explore further topics across our UK Real Estate Horizon Scanning 2020 publication.

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