England to toughen commercial property energy efficiency standards

Out-Law News | 23 Oct 2019 | 9:49 am | 3 min. read

Landlords of privately rented non-domestic property in England and Wales face more stringent minimum energy efficiency standards (MEES) by 2030 under plans put forward for consultation by the UK government.

The consultation follows the government's commitment to net zero emissions by 2050 and is consistent with its 'clean growth strategy', published in October 2017.

The government's preferred target, as set out in the consultation, is an Energy Performance Certificate (EPC) band B by 2030, provided that any work done to bring the property up to standard meets the existing seven-year payback test. It has proposed band C as an alternative.

Cross Siobhan

Siobhan Cross

Partner

Those involved in new developments or refurbishments should consider future proofing their buildings against the increasing trajectory for energy efficiency.

The proposal forms part of the government's plan to go "further and faster" in tackling climate change, in response to the recommendations of the independent Committee on Climate Change (CCC). The EPC band B target could reduce UK emissions by the equivalent of half a million homes by 2030 while saving businesses up to £1 billion per year in energy bills, according to government estimates.

The consultation closes on 7 January 2020.

MEES took effect for both domestic and non-domestic property in 2018. Since April 2018, landlords of non-domestic private rented sector properties have not been permitted to grant a new tenancy or to extend or renew an existing tenancy of a property with an EPC rating of F or G. This prohibition will be extended to cover continuing to let under existing leases from 1 April 2023.

The government is now proposing that all non-domestic privately rented buildings achieve a minimum energy efficiency standard of either EPC band B or band C by 1 April 2030, provided that the measure or package of measures required to achieve this are cost effective. The government is minded to adopt the band B target as its modelling suggests that a band C target is "not ambitious enough" to deliver the required level of emissions reduction and energy savings.

The government is seeking views on whether to legislate for a single 2030 implementation date, or for incremental 'milestones'. The second of these approaches could follow a similar model to that introduced in 2018: so, landlords could be prevented from creating new tenancies or extending or renewing existing leases beyond a certain date where the property does not meet EPC band B or C, with the requirements extended to existing leases from April 2030.

Energy efficiency improvements will be required where the existing seven-year 'payback' test is met: that is, where the expected value of savings on energy bills over a seven-year period once the recommended improvements are carried out is equal to or greater than the cost of those measures.

The government is minded to retain other exemptions from the requirements including where the tenant refuses its consent to the works or where the improvements are likely to reduce the market value of the property by more than 5%. This is despite criticism from the CCC that there were too many exemptions.

Approximately 85% of existing non-domestic buildings in England and Wales would need improvements to meet the required standard if the government was to adopt an EPC band B target, compared to 42% of existing buildings under the EPC band C target. The government estimates that 64% of buildings would be able to reach a B rating, while a further 20% would be able to reach a C rating.

The government intends that responsibility for the energy efficiency of the building will continue to rest with the landlord. However, it is seeking views on potential "market-led solutions" for scenarios in which the tenant has genuine requirements and is willing to fund the required improvements to the building at the start of the tenancy. An example given is the retail sector, in which tenants often require specific lighting, air conditioning and ventilation solutions.

As the existing regulatory framework focuses primarily on the condition of buildings rather than the operational efficiency of their energy, the government will carry out an additional consultation in 2020 on the introduction of mandatory 'in-use' energy performance ratings for private sector non-domestic buildings.

Property law expert Siobhan Cross of Pinsent Masons, the law firm behind Out-Law, said: "The consultation is consistent with the clear direction of travel towards the commitment to achieve net zero emissions by 2050. It was expected that the MEES requirements would be ramped up over time. This is perhaps a further and faster ramping up than expected, but is consistent with the Committee on Climate Change's recent advice".

"Those involved in new developments or refurbishments should consider future proofing their buildings against the increasing trajectory for energy efficiency, and landlords should consider taking advantage of any void periods to do the same," she said.