The recent outcry surrounding climate change has spawned a government consultation proposing the rapid extension of Minimum Energy Efficiency Standards (MEES), so that by 2030 it will be unlawful to rent out a commercial building with an EPC rating below B.
The buildings we live in and work in are responsible for more emissions than cars and aeroplanes. Rented commercial buildings consume over a third of the UK’s energy (excluding industrial processes). If the government is to achieve its ambitions of reducing business energy use by at least 20% by 2030 and achieving net zero emissions by 2050, the energy efficiency of new and existing building stock must be tackled.
Various initiatives have been introduced over many years, with varying degrees of success, but it appears that the MEES regime is here to stay.
MEES came into force in April 2018, making it unlawful to rent out a ‘substandard’ property.
Initially, substandard means a property with an EPC rating below E. It has always been clear that this would need to be ratcheted up over time, but the government has previously declined to commit as to when and how far the minimum standard would need to be tightened.
There are various exceptions to the MEES regime. For example, very short and very long commercial leases are outside MEES, as are buildings that do not require an EPC. Furthermore, landlords do not have to improve a property up to an E rating at any cost and are only required to carry out ‘cost-effective’ improvements.
MEES currently only affects the grant of new leases, including renewal leases. In due course, it will become unlawful to continue to rent out substandard properties on existing leases granted before the advent of MEES. That will happen in April 2020 for residential premises and April 2023 for commercial premises.
‘How dare you?’
The summer of 2019 witnessed a remarkable phenomenon. The activities of young environmental activists such as Greta Thunberg sparked massive global interest in the United Nations Climate Action Summit in New York. The stark message from the summit was that time is running out and greater action is required to combat climate change.
The Intergovernmental Panel on Climate Change has highlighted the importance of limiting global temperature rises by 2030 to 1.5˚C above pre-industrial levels.
It is against this backdrop that on 15 October 2019 the government published a consultation on ‘The Future Trajectory to 2030’, seeking to establish a definite and reliable MEES roadmap for commercial properties.
I will pause at this point to acknowledge that readers will of course have their own personal views on climate change. However, for the purposes of MEES and its effect on landlord and tenant law, personal opinions are irrelevant; what matters is that the government believes in the climate change crisis and is prepared to legislate accordingly.
To B or not to B?
The consultation makes a remarkably simple proposal, that the minimum standard for commercial properties be increased to an EPC rating of B by 2030. It seems that the government is committed to retaining EPCs as the tool for determining the energy efficiency of buildings.
It is proposed to retain the current seven year payback test for cost-effectiveness, although the government hopes that reductions in cost together with increases in the efficiency of certain improvements will mean that measures that are not currently cost-effective will have become so by 2030. The government estimates that 64% of commercial properties have the potential to be improved to B using cost-effective measures, with a further 20% capable of reaching a C rating.
The consultation provides an alternative proposition based on a minimum standard of C. However, that is not the government’s preferred option because it would only capture 42% of commercial properties and not achieve the required outcomes. Raising the MEES bar to B would capture twice as many properties (85%) and reduce energy consumption by nearly three times as much.
The consultation appears open-minded as to what happens between 2020 and 2030. Opinions are invited as to whether it should be a single jump directly from E to B in 2030, or a staged increase with the minimum standard increased by one band every couple of years. The consultation includes examples as to how this might work.
The £5 billion question
The government estimates that it would cost £5 billion to achieve the B trajectory. That is a huge amount of money for landlords to find, but in the long term should be more than offset by estimated annual energy savings of £1 billion by 2030. However, landlords will face the double challenge of funding the works and also finding a way to benefit from the resulting energy savings.
The so-called ‘split incentive’ has bedevilled various energy efficiency schemes. In the context of MEES, the fundamental problem is that landlords have to undertake cost-effective works, but cost-effectiveness is assessed on how quickly the cost of the improvements will be repaid out of projected energy savings. However, landlords rarely benefit from those savings, since energy bills will usually be the responsibility of the tenant, either directly or via a service charge.
The government anticipates that landlords will recoup their costs through enhanced rental values that reflect better buildings with lower outgoings and through increased property values, but acknowledges that hasn’t really happened so far.
The bigger picture
This consultation forms part of a wider review of the regulatory regime surrounding energy performance of buildings, including:
- The government is currently analysing responses to last year’s call for evidence to see how the EPC regime can be improved
- The government has announced that it will consult in 2020 on introducing ‘mandatory in-use energy performance ratings’ for private sector commercial buildings
- The Future Homes Standard consultation on changes to Part F and Part L of the Building Regulations for new dwellings was published in October 2019 and closes on 10 January 2020
- A consultation on Part L of the Building Regulations for commercial buildings is expected later this year
- The Buildings Mission seeks to halve energy use in new buildings and halve the cost of retrofitting existing buildings by 2030
- The Clean Growth Strategy seeks to improve as many homes as possible to an EPC rating of C by 2035
- The current phase of the Energy Savings Opportunity Scheme (ESOS) requires all large organisations to confirm compliance by 5 December 2019