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Energy Performance Certificate ratings below E = Headache for Landlords

 

Landlords, it’s time to isolate your risks and insulate your investments! Why? Because the MEES are coming. Yes, that’s MEES; not mice – although both could impact on your property and cause you headaches.

Regulations have been made to introduce the Minimum Energy Efficiency Standards (the MEES). They’re part of the Government’s plans to reduce emissions of greenhouse gases and energy demand.

Under the MEES, the minimum energy efficiency standard for buildings will be set at an ‘E’ Energy Performance Certificate (EPC) rating on tenancy lengths ranging from 6 months to 99 years. Just as you dreaded getting an ‘F’ at school, an ‘F’ EPC rating for your building will be bad news. This isn’t just a case of ‘must try harder’; a bad rating may require you to spend money to achieve compliance.

From 1 April 2018 the MEES of E will apply to all new leases and lease renewals of EPC certified buildings. It’ll be unlawful to grant new, or renew existing, leases of ‘substandard’ buildings until either: you’ve made sufficient energy efficiency savings; or you can show that the MEES don’t apply or that an exemption to them does. From 1st April 2023 the MEES will be rolled out to all leased buildings.

Responsibility will rest with the landlord of the asset who’ll have six months to comply. The types of works required (upgrading old heating, cooling or lighting systems, and certain thermal elements, windows or doors) take time, so landlords should consider the implications now (see below for tips).

Not every lease will be caught. Lettings for 99 years or more or up to six months (subject to a 12-month maximum period of occupancy) are excluded. The MEES requirements will apply to all assets requiring an EPC, so buildings with an EPC exemption will be excluded (e.g. in England and Wales: listed buildings; places of worship; temporary buildings; small stand-alone buildings; and buildings due to be demolished).

There are also financial caps. If the cost of an improvement would be greater than the predicted energy saving over seven years, the improvement will not be cost effective (You don’t say! we hear you cry despondently.). If the building would still be F or G rated even after all the required cost-effective works are undertaken (or if there are none that can be made) an exemption will apply. An exemption will also apply where necessary consents for the works can’t be obtained (from e.g. tenants or planning authorities), where compliance would devalue the property by 5% or more, or where the wall insulation that’s required would damage the property.

Exemptions aren’t an easy out. They’ll last for 5 years, or to the point at which a tenant vacates. They won’t be transferrable to a buyer (so from 2023 a successor landlord of a substandard property will either need to bring the property up to an ‘E’ within six months, or establish a new exemption). Exempted properties will have to be registered on a central and public Department of Energy and Climate Change (DECC) database. If challenged, landlords will have to prove the exemption is valid.
So, what should a prudent seller or landlord be doing?

Isolate and insulate.

1. Isolate the problem areas. Look at each of your buildings and decide how it will be affected.

• Will it be excluded?
• Is it already compliant? If so, is it likely to remain so (remember, EPCs are only valid for 10 years)?
• Is it currently uncertified? If so, is there likely to be an EPC triggering event (construction, sale or letting) soon? There are pros and cons to certification which you’ll need to weigh in the balance depending on your circumstances.

Once you know which of your buildings are within the MEES and are currently non-compliant, you
can focus your initial attentions on these.

2. Insulate against risk and/or energy inefficiencies. Look at your substandard buildings.
• Do you think they could get a better energy rating if they were certified more accurately? If so, start making arrangements for this – remembering that energy ratings can go down as well as up!
• Could they be brought up to standard by carrying out cost-effective works? If so, do you want to carry these out? What about the timing (costs may be lower if you can time the works to coincide with voids, but then you may not be able to pass the costs onto tenants)? Who’ll be responsible for paying? -Could you negotiate contributions from tenants? Would the works fall within general maintenance and repairs?
• Is an ‘E’ rating simply an unattainable goal for that building using the “cost-effective” analysis? If so, do you want to try to claim an exemption, or to take a longer-term view and do the works anyway?
• Is it time to rid your portfolio of this property before it starts to cause you headaches or is it worth the investment? If the latter, do you want to just sneak into the ‘E’ category, or would you prefer to future-proof your return a little more by aiming for a ‘D’ or even a ‘C’?

Of course, it’s relatively easy to come up with a list of questions, but finding the right answer for each property will take time and (pardon the pun) energy! There’ll be no one-size-fits-all. Tailoring to suit will be required- not only for each building, but for your portfolio as a whole. Local supply and demand issues, tenants’ and other third parties’ views, and the rental and capital value of the building must also be added to the decision-making mix.

To paraphrase a famous Scottish poet, the best-laid schemes of MEES and men often go awry.

The best way to prepare for MEES is to start planning for its impact now (and to be ready for the curve balls which are sure to come your way – the DECC have promised some statutory guidance which may or may not help to plug the holes in terms of what the legislation says and what will be expected in practice).

Don’t wait until the legislative plough is at your door in 2018. Start dealing with this now.  And if it all feels like too big a task, if you need someone to cut through the jargon and explain things in plain English – please give us a call.

27 May 2015.   This Bulletin contains general overview information only. It does not constitute, and should not be relied upon, as legal advice. You should consult a suitably qualified lawyer on any specific legal problem or matter.

If you need advice relating to Energy Performance Certificate ratings, MEES, or any other commercial property issue, please call Helen on 0161 358 0544 or email helenmarsh@hrclaw.co.uk.