The principal provisions of the Minimum Energy Efficiency Standards (MEES)  came into force on 1 April 2018. One year on, we look back to consider the effect MEES has had on the non-domestic buildings market in England and Wales, and gaze into our crystal ball to ponder what MEES may portend for the future.

Why?

The origins of MEES can be traced back to the Climate Change Act 2008, enacted by the UK Government with the aim of achieving an 80% reduction in carbon emissions (from 1990 levels) by 2050.

Buildings are a key source of energy use and carbon emissions, being responsible for an estimated 34% of all UK greenhouse house gas emissions in 2014 (with the commercial sector accounting for 27% of that figure).  

To help meet the targets set by the 2008 Act, various statutory and regulatory measures have been introduced with the aim of reducing the reliance of the UK’s building stock (some of the oldest in the world) on carbon sources.

One of these measures is the Energy Act 2011 which, in its turn, has birthed MEES, the purpose of which is to promote the refurbishment of the least energy efficient buildings.

What & when

What do the MEES regulations actually do and when do they do it from? In the context of non-domestic property within the scope of the regulations:-

  • With effect from the 1st April 2018, the regulations prohibit a landlord from letting property which falls below an E rating in the Energy Performance Certificate for that property, until they have carried out energy efficiency improvements for that property. A landlord may not grant a new tenancy on or after that date, or extend or renew an existing tenancy of a property that is “sub-standard” – in other words, has an energy performance certificate where the energy performance indicator is below E, the minimum level of energy efficiency permitted by the regulations. The regulations only apply to let properties, and not to a sale of a building. If a property is rented out in breach of MEES for less than three months, there will be a penalty of 10% of the property’s rateable value (minimum £5,000, maximum £50,000). For more than three months, the penalty increases to 20% (minimum £10,000, maximum £150,000).

  • With effect from 1st April 2023 the regulations will apply to all privately rented properties that come within the scope of the regulations, even where a lease has been in place for some time and there is a tenant in occupation. Postponing the date of application to all relevant premises is intended to give the landlord sufficient time to improve the energy efficiency of the building up to at least the minimum efficiency level of E, otherwise the landlord will be prohibited from continuing to let.

For our earlier commentaries on these regulations, see our June 2015 briefing and our June 2016 briefing

Energy Efficiency Regulations for non-domestic property
 

  England and Wales
Comes into force

1 April 2018 for new tenancies and renewals of existing tenancies.

1 April 2023 for all other tenancies in scope (including existing tenancies).

Properties affected All sub-standard buildings with energy performance indicator below E.
Triggers

1 April 2018 - new lease or lease renewal/extension.

1 April 2023 – all tenancies in scope (including existing tenancies).

Regulations do not apply to:

- Buildings with an energy performance indicator of E or above.

- Buildings that are to be demolished on a site suitable for redevelopment.

- Listed buildings (but only where works necessary to bring into compliance with MEES would unacceptably alter the character of the building or listed building consent in respect of the works is refused)

- Buildings used primarily or solely as a place of worship.

- Temporary buildings with a planned time for use of two years or less.

- Industrial sites, workshops and non-residential agricultural buildings with low energy demand.

- Stand-alone buildings with total useful floor area of less than 50m²

- Lease of six months or less.

- Tenancy of term certain of 99 years or more.

Exemptions when regulations do apply

- All relevant energy improvements already made, or none that can be made.

- The tenant has refused consent to carrying out of works in preceding five years.

- Third-party consent refused or granted subject to unreasonable conditions.

- Reduction of more than 5% of market value if works carried out.

- Temporary six month exemption for new landlords.

Required action Carry out relevant energy efficiency improvements to bring property up to at least the minimum level of energy efficiency.

MEES – today

Although the property market has had several years to adjust to the likely impacts of MEES, it is only since the publication of guidance in 2017 that the details have become known, allowing only a limited window for proper and full evaluation before the main body of the regulations came into force on 1 April 2018. Now, a little over 12 months on from implementation, some early indicators as to the impact of MEES are starting to appear.

Enforcement

In March 2019, Estates Gazette reported freedom of information (FOI) requests made to every local authority in England and Wales, which revealed that no local authority had evidence of undertaking any enforcement proceedings or prosecuting anyone for not complying with MEES (of the 377 local authorities contacted, 204 reported no enforcement proceedings or prosecutions, the rest either did not hold the information or were not responsible for enforcement because, for example, they might have been boroughs that were part of county councils with that responsibility). 

This situation is likely to change and MEES are expected to gradually show their teeth in terms of enforcement in the commercial sector, with impetus being added as a result of changes to the regulations affecting the domestic sector. 

The government has amended the regulations, and one of the changes is the removal of the “no cost to the landlord” exemption available to landlords of privately rented domestic buildings, who will (as of 1 April 2019) have to pay up to £3,500 to improve buildings with F or G  energy performance certificate (EPC) ratings.

This change addresses one of the complaints previously voiced by local authorities that, as originally enacted, the “no cost to the landlord” principle enshrined within the regulations in relation to domestic property stymied prosecutions.

This update to the regulations provides clarity, and is likely to act as a spur to local authorities in terms of enforcing MEES in relation to domestic properties which, in turn, is likely to feed through to the local weights and measures departments of upper tier authorities who are tasked with enforcing the regulations in respect of non-domestic property.  

EPC ratings 

Despite the lack of enforcement to date, analysis undertaken by Estates Gazette of newly lodged EPCs suggests MEES has had an impact. It found: 

  • F-and G-rated buildings comprised just 4% of all new certificates issued between April and December 2018 (according to a FOI request to the Ministry of Housing, Communities and Local Government). By contrast, 16.4% of all EPCs up to April 2018 fell below this threshold;

  • The amount of A-rated certificates jumped from 1.3% pre-MEES, to 2.6% since April 2018, a rise mirrored in every EPC band above F and G (with the exception of A+, which is a very small section of the market); and

  • A steady decline in the percentage of F and G-rated certificates from a peak of 20.2% in 2012, with the fall particularly dramatic from 2017 to 2018 as the percentage of non-compliant certificates more than halved (from 9.7% to 4.6%) – presumably as a result of landlords anticipating the introduction of MEES.

MEES – tomorrow 

Brexit

It is highly unlikely that Brexit will have any effect on MEES. Although the Energy Act 2011 (the primary legislation behind MEES) implements obligations set out in an EU Directive, the regulations are enshrined in UK law. Unless the government repeals the legislation - and there is no indication of this - MEES will continue to have effect.

Lenders 

MEES are an issue increasingly at the forefront of lender concerns, and the weight lenders attach to them is only likely to increase, particularly in the run up to the extension of the regulations in 2023. 

The regulations will be an issue in valuation where the property to be valued is:

  • let or in prospect of letting, and/or;
  • of a type that when traded would be likely to be purchased by an investor or possibly an owner-occupier who, for reasons such as environmental awareness, would not wish to purchase any property deemed to be “sub-standard” in energy efficiency terms.

As highlighted by the Royal Institution of Chartered Surveyors (RICS) , and based on our own experience, lenders are increasingly requiring advice, not only as to the market value today (e.g. is the property currently below the minimum standard) but also of the risks that impact value over the lifetime of the loan. (e.g. is the property likely to fall below the minimum standard?). 

If finance becomes more difficult or more expensive to obtain for the purchase of “sub-standard” properties (either with a current rating below E, or with a current rating of E or above but at risk during the lifetime of the loan to fall below some future enhanced minimum rating requirement), this could negatively impact on the value. 

Expiry of current EPCs

The EPC was introduced in England and Wales in August 2007 and was extended in 2008 to commercial properties. Its initial purpose was to help residential homeowners make informed decisions about energy use. However, the government has, in part, appropriated the EPC and now it is also used to determine eligibility for grants, set goals for government reports and provide evidence for future policy on tackling climate change. While some are of the opinion that the EPC is a blunt instrument, prone to wide degrees of variation in terms of quality of assessment and not particularly fit for purpose, it does appear to be here to stay (at least in the short to medium-term).

Landlords of properties which were certified early on at the beginning of the EPC regime, and which are coming up to their 10-year expiry date, may be tempted to commission an up-to-date EPC in the expectation that the rating will remain unchanged, though caution should be exercised.

The requirements that govern, and the software that is used to create EPCs, were enhanced and updated in the early years, resulting in a tightening of ratings since 2008 with the result that upon renewal a rating can reduce by a band or two, rendering previously D or even C-rated properties non-compliant.

To EPC or not to EPC

MEES only apply to properties with a current EPC. This has prompted some to question the incentive of commissioning or renewing an EPC on the basis that the penalty for not obtaining an EPC may be lower than the penalty for not complying with MEES. Professional advice should be sought by any landlord or potential landlord contemplating such a course of action.

It is worth remembering that if an eligible commercial property fails to have a valid EPC, liability may arise in the guise of a Penalty Charge Notice for a sum between £500 and £5,000 (depending on rateable value) which could, at the discretion of Trading Standards, be repeated in the event of non-compliance. Further, it is an offence to obstruct a Trading Standards Officer who has requested an EPC and recommendation report for inspection. 

Rent Reviews

Where a leased property, within the scope of the regulations, fails to comply with MEES, tenants may attempt to leverage their bargaining position in negotiations with their landlords. If the building has an EPC rating of below E, the tenant may argue on review (assuming a typical fixed interval, upward only rent review) that a landlord is unable lawfully to let the building to a hypothetical tenant and its rental value is nil (or greatly reduced).

Some rent review clauses include an assumption that the premises can lawfully be let by the landlord to the tenant, or that both parties have complied with their obligations, which will include statutory obligations and compliance with MEES. This may assist the landlord but may very well be open to challenge by a well-advised tenant.

In April 2018, Property Week commented that some studies have estimated that this could affect rental valuations by up to 10%, though the impact on the market remains to be seen.

Standards likely to rise

Today’s E-rating is unlikely to remain the minimum standard. In March 2018, the government’s Green Finance Taskforce issued a report recommending a minimum B-rating by 2035. This also raises the possibility of incremental revisions in the meantime. The very real likelihood of minimum standards being raised in the future should be borne in mind by landlords (and tenants) when considering the nature and extent of any proposed works to improve energy efficiency.

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