Understanding the new Minimum Energy Efficiency Standards – Update

The concept of Minimum Energy Efficiency Standards (MEES) was first introduced by the Energy Act 2011 and, in February 2017, new guidelines were published by the government, including dates after which it will be unlawful to let privately rented properties that are not up to scratch.

The Energy Efficiency (Private Rented Property) (England and Wales) Regulations 2015 mean that from April 2018, landlords must ensure that properties they rent in England and Wales meet a minimum Energy Performance Certificate (EPC) standard.

The MEES will first apply to new domestic and non-domestic lettings and lease renewals from April 2018, to be followed by all existing privately rented residential property on 1st April 2020 and, finally, to all existing non-domestic leases by 1st April 2023.

MEES are based on EPCs and, under the new regulations, they will be set at an E rating and above, meaning that a property with an EPC rating of F or G would be labelled as sub-standard and unlawful to let. Enforcement of these regulations will be by Local Weights and Measures Authorities of Local Authorities who will be responsible for imposing and determining the level of penalty.

An estimated 10% of residential properties and 18% of commercial properties currently have an EPC rating of F or G and will be classed as non-compliant. Where the breach is for less than three months the fine will be equivalent to 10% of the rateable value of commercial properties, subject to a minimum penalty of £5,000 and a maximum of £50,000 and £2,000 for residential properties. Where the breach occurs for more than three months, the fine will be equivalent to 20% of the rateable value for commercial properties subject to a minimum penalty of £10,000 and a maximum of £150,000 and £4,000 for residential properties.

Furthermore, if the landlord breaches the MEES regulations, the breach will be published on the exemptions register for a minimum of 12 months.

Is your EPC rating accurate?

It is estimated that a staggering 70% of EPC ratings are incorrect; therefore, it is important for landlords to first make sure their EPC rating is accurate. The high level of inaccurate ratings is due to the varying quality of the assessments and changes in practice for carrying them out. EPCs are valid for ten years. Changes that have been made to the property since the last assessment may impact negatively or positively on the rating. Given the significant impact a poor EPC rating could have, it is crucial for landlords to seek professional advice and make sure they have up-to-date assessments.

What are the implications for properties that don’t make the grade?

Not only will it be unlawful to let a property that is classed with a sub-standard rating, but it could also be more difficult to sell the property unless it is upgraded. For those looking to sell a property or to raise finance against assets, a low EPC rating could also have a significant impact on the value of the property. Recently, we saw a savvy buyer reduce their offer on a £4m property because the EPC rating was below E.

Lenders have cottoned on to the risk of borrowers’ failure to meet MEES; for example, last year Lloyds Bank launched a Green Lending Initiative, providing development loans with a maximum discount of 20 basis points on loans of £10m or more if the developer meets sustainability targets such as energy efficiency.

Are there any exemptions?

There are several potential exemptions to MEES, including:

• A potential exemption for Listed/historic buildings and those in conservation areas. Such exemptions are not automatic and the criteria to grant them is strict, requiring that any compliance with EPC requirements would ‘unacceptably alter the character or appearance’ of a building.
• Where an independent surveyor determines that the relevant energy efficiency improvements would reduce the Market Value of the property by more than 5%.
• The improvements are deemed financially unviable as they do not pay for themselves through energy cost savings within a seven year time frame

An exemption must be registered on the central government PRS Exemption Register. Exemptions are valid for five years. The Exemptions Register is currently being piloted and will be available on www.gov.uk by 1st October 2017.

Please note these regulations do not apply to tenancies of over 99 years or tenancies of less than six months with no right of renewal, places of worship or temporary buildings.

When is the best time to upgrade a property?

With the first deadline dates looming, when is the best time for landlords to upgrade properties and what are the ‘quick wins’ in terms of energy efficiency? One option is to wait until the end of the lease; however, this runs the risk of the landlord having an extended void period while work is carried out. It might be better to work with the tenant to upgrade the building, including implementing tenant incentives for the work to be carried out during the lease. The offer of lease break options is also worth considering to enable an energy efficiency upgrade.

What measures can be taken to improve a low EPC rating?

An EPC is always accompanied with recommendations on how to improve the energy performance of the property. Recommendations vary considerably and can include some of the below:

About 60% of a building’s heat is lost though its fabric and drafts caused by poor sealing are among the top causes of heat loss. Replacement doors and windows are often required to rectify this, but it might simply be a question of installing new or renewing seals. Other measures include cavity insulation and improving roof insulation, but improving a building’s fabric can be disruptive.

Lighting and HVAC (heating, ventilation and air-conditioning) are areas where fairly simple measures can provide large gains. For example, replacing tungsten or halogen spot lamps with LEDs or compact fluorescent tube lighting can make significant savings.

With deadlines looming, landlords need to think now about their property’s energy efficiency performance so that they can plan well ahead to minimise the impact of MEES.