Following the Dilapidations Association event on 9 March, speakers Simon Hartley, Ben Devonport, Simon Green and Peter O’Brien discuss additional minimum energy efficiency standard (MEES) restrictions coming into force next month and what the future may hold for the regime.
Next month, the Energy Efficiency (Private Rented Property) (England and Wales) Regulations 2015 (the MEES Regulations), made under the Energy Act 2011, will have been in force for five years. They restrict the grant or continuance of tenancies of “domestic private rented property” and “non-domestic private rented property” after prescribed dates in circumstances where the relevant property has a minimum energy performance certificate rating of less than band E, save where one of a few specified exemptions applies.
In short, since 1 April 2018, a landlord cannot grant or renew a lease of sub-standard non-domestic property.
New restrictions
It was always intended that the MEES restrictions would be tightened. Since 1 April 2020, continuing to let sub-standard domestic property has been restricted. From 1 April 2023, the prohibition on continuing to let where a valid EPC expresses the energy performance indicator as being below band E will also apply to premises that are not a dwelling.
However, this restriction will not apply to licences, leases of less than six months or more than 99 years, or to properties not requiring EPCs.
Enforcement
The MEES Regulations do not invalidate tenancies. Penalties are civil, with an initial fine for commercial premises of the greater of £5,000 or 10% of rateable value, to a maximum of £50,000. If in breach for more than three months, penalties rise to £10,000 or 20%, up to £150,000. Providing misleading information carries a further fine. Non-compliance will also be published.
The MEES Regulations in relation to non-domestic properties are to be enforced by local weights and measures authorities. However, local authorities have failed to enforce the MEES Regulations. When initially asked why, authorities cited confusion concerning rules and responsibilities, a lack of complaints and funding questions. By 2018-20, enforcement pilots were supposed to be taking place in seven areas, reported on in July 2022 by the Centre for Sustainable Energy.
There have now been two rounds of the £6.3m Private Rented Sector Domestic MEES Compliance and Enforcement Funding Competition to provide funding to support 85 local authorities to create processes to enforce the regulations in relation to domestic property. Funded by the then Department for Business, Energy & Industrial Strategy, this scheme has seen some authorities appoint MEES compliance officers.
Future developments
The government plans to review the current minimum rating upwards. The Minimum Energy Performance of Buildings (No2) Bill was scheduled for its second reading in the House of Commons on 6 May 2022, but its listing on the UK Parliament site has been updated no further. If progressed, the Bill will increase the minimum for non-domestic property to at least grade B by 2030, and for domestic property at least grade C by 2035.
It therefore appears MEES Regulations are intended to significantly contribute to achieving the Conservatives’ target of achieving net zero emissions by 2050.
Simon Hartley is a partner in the property litigation department at Weightmans
MEES and dilapidations
When inspecting a demise on behalf of a landlord or tenant, a good amount of desktop research will be carried out prior to the visit. Not only is it important to understand the lease, but also to be aware of the market and the status of the property in question. Even when acting for a landlord, it is common to be in a position where the party’s full intentions have not been declared. Desktop research is an important process to help unearth potential intentions, but how is this relevant to MEES and dilapidations?
Understanding the role of MEES in the industry can feed into key decisions for landlords when a lease ends. The government provides a searchable EPC database that allows anyone to find and understand EPCs for eligible properties. EPC ratings are relevant at the beginning of the dilapidations process because they can provide insight into what the landlord is required to do as a minimum to meet the next MEES criteria/date, otherwise the landlord may be subject to local authority enforcement.
Common recommendations, found within the EPC’s recommendation report, usually relate to improving insulation, lighting efficiency and dated heating systems. If a dilapidations representative has done their desktop research, tenants’ advisers may have access to supersession arguments,
while landlords’ advisers will have to be cautious when endorsing a schedule.
However, it is not all good news for the tenant. Modern leases may contain specific clauses that refer to EPCs and the tenant’s obligations not to reduce their rating. Licences and alterations clauses may require the tenant to provide an EPC after fit-out works. If a tenant has reduced the rating, or not provided a revised EPC after a fit-out, the landlord may have a stronger claim when asking for reinstatement.
While the MEES Regulations have a role in dilapidations, there are not many examples of MEES becoming a powerful argument in negotiations. Because EPC quality still varies, and information can be tailored to achieve the desired rating, it remains easy for parties to overcome this hurdle. However, as the process improves through better-quality reporting and local authority enforcement, MEES may become a greater influence in dilapidations negotiations by 2030, when the minimum rating may be raised to B, requiring significant energy improvement works.
Ben Devonport MRICS is a partner at Hart Dixon
EPC changes
EPCs have been with us for 15 years. The EPC government software is always being improved and, after long-standing industry calls, the carbon factors on electrically driven heating plant have recently been changed (commercial only). This is the result of the National Grid becoming a lot less dependent on fossil fuels over the past 20 years and more reliant on green energy.
This is all part of the government’s drive to make the UK carbon-neutral by 2050, ensuring every house, office and factory uses electrical heating (ideally heat pumps) and making the National Grid “very green” by using mainly renewable energy derived from the wind and the sun.
A dynamic model built using complex software can assist with understanding the impact of these changes. This enables exact plant to be installed and reviewed against the previous year’s energy bills, for total accuracy. Once this base model is complete, the building elements can be changed, to improve fabric, alter services and rerun the model to see the impact on the EPC and carbon saving. See the table below, which shows an example of a range of potential improvement works being made to a 40,000 sq ft, two-storey 1990s office.
Rerunning the software against the example with 2023 carbon factors results in option 3 changing from D83 to B48; option 4 from C52 to B36; and option 12 from B27 to A10.
Correcting the carbon emissions factor in the EPC software, while correct in engineering terms, appears to make EPC ratings A and B much easier to achieve without too much change to the building’s fabric or services.
Example: 40,000 sq ft, two-storey 1990s office (modelled in 2022)
|
Option |
Improvement work |
Result |
|
1 |
Base |
E103 |
|
2 |
Insulate walls and roof, install new windows |
E101 |
|
3 |
Variable refrigerant volume (VRF) system for office |
D83 |
|
4 |
LED lighting and controls |
C52 |
|
5 |
Central air handling unit (AHU) |
D97 |
|
6 |
VRF + AHU |
D78 |
|
7 |
VRF + LED lighting |
B40 |
|
8 |
VRF, LED + AHU |
B34 |
|
9 |
Photovoltaic 33% |
D97 |
|
10 |
Photovoltaic 50% |
D93 |
|
11 |
LED + PV |
B32 |
|
12 |
VRF, LED, AHU + 1/3 PV |
B27 |
|
13 |
VRF, LED, AHU + 1/2 PV |
A24 |
Simon Green BEng (Hons) FCIBSE CEng is a director of Green Building Design Consultants
MEES and valuation
The market has known about MEES for a long time, so the changes should not take anyone by surprise.
However, as previously reported by EG, there are 24,000 non-domestic buildings in the UK with an inadequate EPC, and this equates to around £2.5bn in potential loss of rental income.
These figures predate the change to the calculation methodology in June 2022, adjusting how buildings are scored, with gas-heated buildings scoring negatively. The actual impact could be greater, but this will not be clear until all properties have been reassessed.
The big question is: has this had an impact on real estate values? In short, yes and no.
It was always clear the repricing of non-compliant property assets would largely be driven by the lending community. In simple terms, if you cannot borrow money to buy a property, this restricts the number of bidders so, in turn, the achievable sales price should be lower.
The credit teams at the big banks have been turning down loans based on EPC ratings for some time and borrowers have had to turn to the secondary lending community (which has been less EPC-focused) to fill the gap.
This has propped up the non-compliant section of the market because it has been able to trade as normal.
But is that all about to end? Not likely, as the cost of upgrading the majority of buildings to grade E is not exorbitant and usually involves upgrading lighting to LEDs and improving insulation. Until now, property owners have been able to avoid these additional costs, but these are now going to have to be absorbed in order to legally continue to lease a building.
One area of the market that has repriced relates to “stranded assets”. These are properties which are subject to economic obsolescence owing to the costs involved in meeting future energy efficiency standards. These types of properties mainly comprise long-term redevelopment/refurbishment opportunities and the required capital investment to make them a success.
What happens when the MEES requirements rise to a minimum of grade B in 2030? This brings 63,000 more non-domestic buildings within scope, and with the costs of upgrading being much higher, it could see more assets labelled as stranded.
Peter O’Brien BSc (Hons) MRICS is head of valuation consultancy at Avison Young
