Consultations on minimum energy efficiency standards published; the real estate industry is encouraged to respond

Posted: 25/07/2014

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Two long-awaited consultations on proposed regulations for minimum energy performance standards (now called minimum energy efficiency standards (MEES)) were published this week[1]:

• ‘non-domestic’ properties MEES consultation[2];
• domestic properties MEES consultation.

This article looks at the ‘non domestic’/commercial consultation.

MEES could adversely affect a property’s income stream and require capital expenditure.  Properties with an energy performance certificate (EPC) rating of F or G will be unlettable until works improving the property’s energy efficiency are carried out.  This will be the case unless the MEES regulations do not apply or the landlord can demonstrate that it has the benefit of an exemption.

Interestingly, the consultation does not include draft regulations; perhaps indicating that the Government has not yet settled its overall policy.  Accordingly, this is an important consultation and those involved in the real estate industry are encouraged to have their say.  Both consultations close on 2 September 2014.

Feedback is sought on a number of issues including:

• scope of the regulations - what buildings or lease types should be included or excluded from the MEES regulations and whether they should apply to lease renewals or extensions;
• cost safeguarding provisions - whether landlords of F and G properties should only be required to make improvements which can be made at no net or upfront cost, eg through a Green Deal finance arrangement;
• exemptions - how long an exemption should last and what proof of an applicable exemption should be required;
• timing - should there be a ‘soft’, a ‘hard’ or (the Government’s preferred option) a phased introduction of the MEES regulations from 1 April 2018.  Under the phased introduction, the Government is proposing a backstop date of 1 April 2023, when all leases would be caught (unless an exemption applies).  The Government believes that this gives ‘sufficient time for landlords and tenants to negotiate and agree any improvements before the regulatory obligation kicks in’, five years being ‘around the time taken for the average commercial property lease to expire’.

Proposed scope of the MEES regulations

• A-E rated properties in the clear - the Government proposes to set the minimum energy efficiency standard for commercial properties at an E rating.  Only F and G rated properties (estimated to be around 18% of the total commercial stock) will need to implement measures to bring them up to an E rating before letting.
• only lettings caught – the regulations will not apply to sales of commercial property nor to owner occupied commercial property;
• short lets and very long leases may not be caught - whilst an EPC is required regardless of the lease length, in response to stakeholder feedback, the Government is considering exempting short leases (those for less than six months) and very long leases (those over 99 years).  However, more than two short leases granted to the same tenant would need to comply with the regulations;
• properties that do not require an EPC not caught - buildings that do not require an EPC under the Energy Performance of Buildings (England and Wales) Regulations 2012 (2012 Regulations) will be excluded from MEES regulations.  The classes of buildings exempted from the EPC regime were widened in January 2013.  However, the current guidance on the new exemptions contains inconsistencies and creates uncertainties.  These will flow through to the MEES regime unless improved guidance is issued.  Interestingly, paragraph 43 of the MEES consultation suggests that where an EPC has been obtained ‘voluntarily or due to previous versions of the EPC requirements’, the property will not be expected to meet the MEES regulations until an EPC is actually required under the 2012 Regulations.
• lease renewals and extensions may be caught – currently, lease renewals and extensions do not trigger an EPC but there are arguments for (and the Government is consulting on) extending the MEES regime to include such transactions where an EPC exists.

Proposed exemptions

• Golden Rule exemption – where a property has an F or G rating, it is proposed that landlords will only be required to make improvements that meet the “Golden Rule”[3].  Broadly, the Golden Rule requires that repayments for improvements (including interest charges) must be the same or less than the expected energy bill savings.   One major problem is that presently Green Deal finance is not available for commercial properties.  Furthermore, even if it was, landlords may decide not to use it.  The consultation, therefore, seeks views on whether landlords should be exempted from reaching the E rating where they can demonstrate that they have carried out all improvements that pay for themselves in energy bill savings within a prescribed period and how such an exemption might work.
• lack of consent exemption - the regulations will not require landlords to carry out improvements where necessary third party consent cannot be obtained or is subject to unreasonable conditions (eg consent is not forthcoming from a planning authority, superior landlord, an existing tenant or a lender to either the works themselves or to the finance chosen to pay for them). 
• possible devaluation exemption – the Government proposes that landlords should not have to carry out improvement works ‘which are deemed to result in a net material decrease in a property’s capital or rental value’ (to be assessed by an RICS accredited valuer).  The consultation stresses that the overall decrease in property value would need to be ‘material’ and asks whether this should be left to the valuers’ judgement or whether the decrease should be set as a percentage of the property’s capital or rental value.

Exemptions time limited

It is important to note that the ‘Golden Rule’ exemption and the ‘lack of consent’ exemption are not intended to last in perpetuity.  The Government proposes that they should expire after five years, or earlier where a tenant vacates the property (where the exemption was because of a tenant’s refusal to consent).  When the exemption expires, the landlord would need to carry out the improvements necessary to get an E rating or again demonstrate an exemption in order to let the property.

Other proposals

• enforcement by Trading Standards Officers - as with the EPC regime, it will be up to landlords to satisfy themselves (and retain appropriate evidence) that a property complies with the MEES regulations.  The Government is, however, considering whether some form of third party certification of exemptions may be desirable to provide certainty.
• penalties for non-compliance to be set as a percentage of the property’s rateable value – this is the Government’s preferred option with a fixed penalty where the formula cannot be applied (eg for properties exempt from business rates).  The Government is also considering whether there should be a minimum and a maximum penalty level.

What next?

Make sure responses are submitted before the 2 September 2014 deadline and look out for the resulting regulations; the Government plans to issue its response to the consultation and lay the regulations by the start of 2015.

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