_Commercial landlords: Are you ready for the new Minimum Energy Efficiency Standards?

What is the minimum energy efficiency standard for a commercial property (MEES)?

The Energy Efficiency (Private Rented Sector) (England and Wales) Regulations 2015 will make it unlawful from April 2018 to let residential or commercial properties with an Energy Performance Certificate (EPC) rating of ‘F’ or ‘G’ (i.e. the lowest 2 grades of energy efficiency).

From 1st April 2018, the regulations will be enforced upon the granting of a new lease and the renewal of existing leases, and from 1st April 2023, MEES will be extended to cover all leases, including where a lease is already in place. All non-domestic property types are in scope of the regulations, except for those that do not require an EPC under current regulations, such as listed buildings.

MEES only applies to buildings that require an EPC under current regulations. It is important to note, however, that not all listed buildings or those in a conservation area will be automatically exempt from the regulations. MEES also does not apply to very short lettings (less than 6 months), or to lettings of 99 years or more.

Penalties are largely based on the rateable value of the commercial property, with a maximum fine for non-compliance of £150,000 (per asset).

Why are these changes taking place?

The built environment has been identified by government as a major contributor to Greenhouse Gas (GHG) emissions and thus poses a threat to the UK meeting its 80% carbon reduction target by 2050. The Government hopes that the MEES regulations will help improve the energy efficiency of older buildings while working towards achieving the UK’s carbon reduction targets.

Owners or landlords of commercial properties with a rating of F or G may be liable to pay large fines from April, 2018 

What are the exemptions?

Commercial landlords will be exempt from having to comply with MEES if they can demonstrate one of the following:

• All cost-effective energy efficiency improvements, either within a seven-year payback or under the Green Deal’s “Golden Rule”, have been carried out.

• Consent to undertake works is refused by a third party, such as a Local Authority or an incumbent tenant.

• A suitably qualified expert provides written advice that the improvements would result in a devaluation of the property by 5% or more, or that the works would damage the property.

Exemptions last for five years and will need to be lodged on a centralised register to be created by Government.

What do these changes mean for commercial landlords?

 MEES will have significant impacts for landlords, including:

• It will make some properties illegal to let unless they are upgraded to meet the minimum standards. It is estimated that approximately 20% of non-domestic properties are in the ‘F’ and ‘G’ rating brackets

• Valuations of such properties could be affected if their marketability is diminished

• Rent reviews for properties in this situation could also be affected

• Implications for dilapidations assessments may also exist

What can you do?

In the first instance, we suggest that if your commercial assets will be impacted by MEES you should contact us so we can help you to identify the potential risk to your assets.

There is a high likelihood that the minimum energy standards proposed for 2018 will be raised in the future and Government is committed to implementing this policy.

With the implementation of the minimum energy standards legislation less than 6 months away, time is short to minimise risk. We suggest the following immediate actions:

• All property assets need to have a valid EPC

• Where the EPC rating is ‘F’ or ‘G’ (or is at risk of becoming so)an “Energy Efficiency Plan” should be put in place to improve the energy efficiency of the property. This should include assessing the costs and benefits of improving energy efficiency and weighing these against other impacting factors within the business plan for the property.

• Energy efficiency improvements should take advantage of void periods, lease breaks and/or be included as part of the on-going maintenance and renewal programme.

How can Knight Frank help?

Knight Frank can provide a full compliance service, including:

• Advice upon the legislation and its implications for your assets.

• Assess current energy efficiency and energy performance risk across your portfolio and for individual assets.

• Produce a bespoke risk management plan (“Energy Efficiency Plan”) for your buildings to implement any necessary energy efficiency improvements, aligned with the building life cycle.

• The Energy Efficiency Plan will include fully costed investment grade proposals for achieving the minimum standards required.

• Negotiate with landlords/tenants regarding the completion of energy efficiency projects.

• Procure and manage any necessary improvement works.

• Provide energy performance reports and ratings for statutory compliance and for marketing purposes.