Buildings are responsible for around 31% of carbon emissions in the UK. Reducing their energy consumption is therefore one of the major challenges in the race to achieve net-zero emissions by 2050.

Last month the Department for Business, Energy and Industrial Strategy (BEIS) issued two consultations concerning the energy efficiency of non-domestic property. Here we bring you up to date on the latest proposals relating to Minimum Energy Efficiency Standards (MEES).

Where are we now?

A building must have a valid Energy Performance Certificate (EPC) when it is sold or rented, including renewal lettings. The EPC shows the property's energy efficiency rating, band A being the most efficient and G the least efficient.

Under the Energy Efficiency (Private Rented Property) (England and Wales) Regulations 2015 (MEES Regulations) a minimum energy efficiency standard of band E applies. It is already unlawful to let a sub-standard non-residential property unless a valid exemption has been registered. From 1 April 2023 this will be extended to existing lettings, making it unlawful to continue to let a sub-standard property unless a valid exemption has been registered.

In its 2019 consultation the government proposed that the minimum energy efficiency standard should increase to band B by 2030. This was confirmed in the Energy White Paper in December 2020. The requirement for band B will increase the proportion of the non-domestic rented stock which is currently sub-standard from around 10% to around 85%, giving the Regulations much wider reach. The government views this as necessary because the building stock is responsible for such a large proportion of the UK's carbon emissions.

What are the key proposals in the March 2021 consultation?

Phased implementation - band C by 2028 and band B by 2030

Landlords will be required to achieve band B in two stages by means of two "compliance windows".

First compliance window

  • By 1 April 2025 - landlords must submit a valid EPC for every let property to a new online PRS compliance and exemptions database. This starts the clock for the first two-year compliance window
  • By 1 April 2027 - unless the existing EPC is band C or above, landlords must obtain another EPC to show that they have improved the building to band C, or have achieved the highest EPC band that a cost-effective package of measures will deliver. In the latter case they must also register a valid exemption.

Second compliance window

  • By 1 April 2028 - landlords must submit a valid EPC to the same online PRS database (the consultation seems to suggest they must do so even if the EPC submitted at the beginning of the first compliance window is still valid). This starts the clock for the second compliance window
  • By 1 April 2030 - unless the existing EPC is band B or above, landlords must obtain another EPC to show that they have improved the building to band B or have achieved the highest band that a cost-effective package of measures will deliver. As before, in the latter case they must also register a valid exemption.

This is intended to make it easier for local authorities to enforce the MEES Regulations, because they will be able to identify which properties are compliant, which properties need to be improved or to have a valid exemption registered and, by elimination, which properties have not complied with the requirement to submit a valid EPC.

Move away from enforcement at the point of letting

The new compliance window framework represents a move away from the current regime of enforcement at the point of letting. This is not just to help with enforcement, as explained above, but also to improve the position for properties let in a shell-and-core state. The current system does not work well for such properties because, to be compliant at the point of letting, landlords either have to install measures which will often immediately be replaced by the tenant, or tenants have to pay for improvements before they legally become the tenant.

New six-month exemption for shell-and-core properties

The government recognises that the new framework will not wholly solve the problem for shell-and-core properties which are let close to or after the compliance deadlines. It is therefore proposing that a tenant must have occupied the property for a minimum of six months before enforcement action can be taken against the landlord for failure to comply with the MEES Regulations.

"Three quotes" system for the seven-year payback rule to be replaced by a user-friendly "payback calculator"

Landlords are only required to carry out improvement works if they are cost-effective under the seven-year payback test. Broadly speaking, this means the expected value of savings on energy bills over a seven year period must be equal to or greater than the cost of the works. There will be no change to the payback test itself, but the government recognises that the current requirement to provide three quotes for the works is onerous so it proposes to substitute a payback calculator.

Tenants to be given some responsibility for MEES compliance

The consultation suggests this would only apply to fit-out works, but the proposal is not entirely clear. It would be coupled with a duty of co-operation requiring landlords and tenants to work together to achieve compliance. New primary legislation would be needed to place obligations on the tenant.

Other proposals in brief

  • All non-domestic rented buildings must have a valid EPC at all times
  • Exemptions to be reviewed at the beginning of each compliance window
  • Local authorities to be able to issue a request to landlords and tenant to inspect properties for compliance with the MEES Regulations
  • Updates to the penalty framework to help enforce the new framework (although no increase in penalties is proposed).

Some issues to consider

Improvement costs

The requirement to bring let non-residential property up to band B by 2030 is inevitably going to increase costs for landlords. Whether or not some of those costs can be passed on to the tenant will depend on the terms of any existing lease where the property is already let.

New leases will need to be negotiated in light of these latest proposals. Landlords might argue that the tenant should pay for any future energy efficiency improvements as they will reap the benefit of lower energy bills. Depending on the length of the lease term, tenants might argue that the landlord should bear the cost as it will enjoy a greater benefit through increase in the capital value of and the continued ability to let the property. There are no easy answers here and each lease has to be individually negotiated.

Compliance costs and enforcement

There will be increased compliance costs for landlords through the need to maintain a current EPC at all times, deal with the compliance window requirements, register exemptions where necessary and keep exemptions under review.

Historically, there has been little enforcement of the MEES Regulations, one problem being that local authorities have suffered from a dearth of information. These proposals aim to tackle that issue by providing local authorities with a dataset to help them identify which properties in their area already meet the required standard, which are sub-standard and, by elimination, those which may not have complied with the requirement to present an EPC. However, it is hard to see how enforcement can be improved significantly without an injection of funding, given that local authorities have no financial incentive to enforce the MEES Regulations and are very short of resources.

Who should be concerned about these proposals?

As the MEES Regulations apply to landlords, this consultation will primarily be of interest to investors. They may wish to look at the proposals in detail and consider submitting a response.

Responses must be submitted by 23.45 on 9 June 2021 and the consultation can be found here.