2015 Energy Efficiency Regulations – a real game-changer for the property sector
Author: Kerry Mashford Date: 06/10/2016
Our Chief Executive looks at the introduction of the potential game-changing minimum energy efficiency standards (MEES) for both domestic and non-domestic privately rented property. Both the UK and the EU face an enormous decarbonisation and energy-saving task ahead of them. It’s estimated that buildings account for around 40% of the EU’s total energy consumption and 43% of the UK’s total carbon dioxide emissions.
Many feel that, over the past few years, the UK has dismantled many of its energy and environmental strategies and has back-peddled on many of its earlier achievements. The decision to leave the EU casts further doubt on the UK’s future commitment. However, some of these fears were allayed when the UK Government accepted its fifth carbon budget at the end of June. This set a target for UK emissions between 2028 and 2032 equivalent to 57% below 1990 levels: a tougher target than that agreed by the EU, which requires a 40% cut by 2030 on 1990 levels.
The introduction of minimum energy efficiency standards is one of the measures that will help the Government achieve its targets. The Energy Efficiency (Private Rented Property) (England and Wales) Regulations 2015 set out minimum energy efficiency standards (MEES) for both domestic and non-domestic privately rented property, and will make it illegal to let a property unless it has an EPC rating of E or higher.
When the regulations were laid before Parliament in February, 2015, John Alker, then Acting CEO of the UK Green Building Council, said: “This could be the single most significant piece of legislation to affect our existing building stock in a generation, affecting a huge swathe of rented properties.”
The regulations apply to privately-rented domestic and non-domestic properties in England and Wales. There are different regulations for Scotland. In the domestic sector, the regulations only apply to tenancies, so ‘homes in multiple occupation’ are not included.
The regulations apply to any rented property which either requires an EPC or already has one. The EPC must be the most recent one and must be no more than 10 years old. The regulations do not apply to any building that doesn’t require an EPC, such as listed buildings or buildings less than 50m2 and, in the non-domestic sector, temporary buildings or buildings with a low energy use. Also, the regulations don’t apply to short lettings (six months or less) and those over 99 years.
- The regulations set the minimum energy efficiency standard at Energy Performance Certificate (EPC) grade E.
- Eligible properties will have to be improved to a minimum E EPC rating before they can be let.
- Only appropriate, permissible and cost-effective improvements are required. Obviously, this will be tested in law.
- From 1 April 2016, residential tenants are able to request landlord consent – which must not be unreasonably refused – for prescribed energy efficiency improvements, unless either certain exemptions apply or the landlord proposes alternative energy efficiency measures. Tenants are expected to fund the improvements.
- From April 2018, private landlords (both domestic and non-domestic) will need to ensure that their properties reach at least an E EPC rating before agreeing either a new letting or the renewal of a tenancy.
- From April 2020 (domestic) and 2023 (non-domestic) the regulations will be extended to properties where a lease is already in place or is occupied by a tenant. In other words, it will be an offence to continue to let a sub-standard property.
Exemptions from MEES
Exemptions will be available where landlords can provide evidence of any of the following:
- The recommended improvements are not cost-effective - the value of savings of the relevant energy efficiency improvement measures would not achieve a payback through energy savings within seven years.
- Third-party consent or permission is withheld (for example, from tenants or the planning authority).
- The measures required would result in a reduction of more than 5% in the market value of the property, or of the building of which it forms a part. This would need to be supported by a report prepared by an independent surveyor.
Exemptions will last for up to five years and will only be valid when lodged on a public register.
MEES penalties and appeals
Enforcement is through local Trading Standards Officers. Penalties could be significant, rising up to £150,000. They will reflect the degree of the infringement and the length of non-compliance, and be based on the property’s rateable value. Non-compliance will also be published. As from 1 April 2017, an enforcement authority can serve:
- A penalty notice to the landlord where a rented property is not compliant and is not exempt.
- A penalty up to £5,000 for providing either false or misleading information in the exceptions register.
- A penalty of £5,000 or 10% of the rateable value (whichever is the greater) for an initial breach.
- Further notices and penalties where the landlord fails to take the action required within the specified period.
- A penalty of £10,000 or 20% of the rateable value (whichever is the greater up to a maximum of £150,000) for any persistent breach.
Having received a penalty notice, a landlord can request a review of the decision, and can make an appeal.
What landlords, tenants and property agents might need to do about MEES
- The EPC ratings calculation method was changed in 2011 resulting in generally lower EPC ratings post-April 2011, especially in the non-domestic sector. When buying or selling properties, EPC ratings that pre-date this change should not be relied on. There are instances of sellers proceeding most of the way through a property transition only to find that an informed buyer requests a reassessment (resulting in a lower rating) and the transaction is abandoned. Sellers are therefore advised to ensure that properties have EPCs dated after 1 April 2011 before going to market. Buyers are also advised to check this when purchasing.
- Tenants can commission EPCs independently and these will override older EPCs. This is another reason why landlords should make sure EPCs are very current when letting and when buying to let.
- For underperforming buildings (EPC rated F and G) it will be important for landlords and tenants to understand the improvement options that are available to them, and the likely costs of meeting the new minimum standards. Organisations such as the National Energy Foundation can help with this, providing advice on the most cost-optimal ways of adhering to the standards and alternative options to upgrading a property, even increasing its rental or market value.
- EPC ratings bear little resemblance to the energy intensity of a building (energy used per unit area). Be aware that exemplar buildings with BREEAM Excellent ratings (for example) or high-profile iconic buildings designed by international architects are no guarantee of either a good EPC or good energy performance.
- Many in the industry expect MEES EPC thresholds to be tightened further in the future, eventually making E and even D-rated buildings unlettable. The Government has hinted that it will review MEES in 2020. Landlords, tenants and property agents should realise that incremental improvements might not be the most cost-effective approach so alternative ways of achieving D and C ratings should be explored before embarking on any investment in energy efficiency measures.
- Evidence is beginning to emerge of market value uplift for properties that are more energy-efficient. Such a price premium might well become more tangible for buildings that have evidenced energy performance – for example, a Display Energy Certificate (DEC) or VolDEC, which is the National Energy Foundation’s operational energy performance certification scheme based on the methodology used with mandatory Display Energy Certificates. In particular, VolDECs solve the issues around the landlord and tenant energy split. They provide property owners and operators with energy ratings for the specific areas of a building that they control or manage, and are therefore able to improve.
- There is also a growing acceptance of a link between environmental comfort and productivity in the workplace; and of sustainability credentials (of organisations and the buildings they occupy) and staff attraction and retention. These links reinforce the benefits of having better (realised) energy efficiency.
- In highly serviced and poor-performing offices, the cost of energy per unit area is already approaching the rental cost. Presenting a total cost of occupancy argument could lead to higher rents combined with lower energy costs, also increasing energy security and exposure to energy price volatility – a win for both landlord and tenant.
- Evidence shows that the actual performance of both new buildings and those having undergone refurbishment, rarely meets the predicted energy performance, often underperforming by a factor of between 2.5 and 4.5 times. It is therefore essential to adopt approaches such as the National Energy Foundation’s Assured Performance Process to minimise this ‘performance gap’ and, at the same time, not to over-estimate the savings that improvements might achieve.
MEES - a true game-changer
MEES has been described as a ‘game changer’, and it will be interesting to see how the regulations affect the market. I’ve no doubt that some organisations will try to avoid them, take advantage of any loopholes or simply stick their heads in the sand. Given the experience of ESOS (where hundreds of organisations were still non-compliant after two extensions to the initial deadline), MEES will need to be closely monitored and rigorously enforced.
I suppose we can take some comfort from the fact that the market will do some of the policing, hitting non-compliant property owners where it hurts – impacting on either their public reputation or their bottom line. As a ‘brown discount’ begins to be applied to F and G buildings and a ‘green premium’ to those at E or above, those ignoring MEES will experience reduced rental incomes and falling real estate values.
Maybe MEES really will be the “most significant piece of legislation to affect our existing building stock in a generation”. It’s certainly very important and has serious potential to make an impact on some of the big issues we face, helping to: reduce energy use, improve energy security, cut CO2 emissions, tackle fuel poverty, drive retrofit and create jobs.
This article was first published in the October 2016 issue of Energy World magazine, published by the UK Energy Institute, www.energyinst.org