At a glance
- On 1 April 2018, new rules come into force making it unlawful to let properties in England and Wales below a certain energy efficiency rating
- A quarter to a third of properties are currently at risk of falling below the minimum standard
- Auditing and upgrading properties can take significant time, so it is important to act now to ensure compliance
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From 1 April 2018 it will become unlawful to let properties in England and Wales that fall below a new ‘Minimum Energy Efficiency Standard’ (MEES).
Timeline for MEES
1 April 2018 – Domestic and commercial – New leases and renewals
1 April 2020 – Domestic – All leases, including current
1 April 2023 – Commercial – All leases, including current
We explore the details of the upcoming energy efficiency rules and how you can remain compliant.
Background to the changes
The Energy Act 2011 featured various provisions aimed at reducing the UK’s carbon footprint. This included several measures to improve the energy efficiency of properties.
New builds have been subject to increased energy efficiency standards for a number of years. It is now time for similar rules to be introduced on existing properties.
A new minimum standard – ‘E’ rating
Following several years of consultation, the new ‘Minimum Energy Efficiency Standard’ (MEES), has now been confirmed by the Department of Energy and Climate Change (DECC)
From 1 April 2018 properties will need to achieve a minimum of an ‘E’ rating on their energy performance certificate (EPC).
2018 – new leases and renewals
From 1 April 2018 it will be unlawful to grant a new lease or renew an existing lease if a property’s EPC rating falls below ‘E’. This applies to both domestic and commercial lets.
That means that your real estate customers will be unable to lawfully rent out a property that falls below an ‘E’ rating, subject to certain specific exemptions.
While property owners are most at risk, property occupiers who sub-let any part of their premises are also affected.
2020 and beyond – all leases
Importantly, limiting MEES to new leases and renewals is only a temporary measure. Over the coming years MEES will become compulsory on all leases.
This will first happen for domestic properties on 1 April 2020, and then for commercial properties on 1 April 2023.
From those dates, leases will automatically become unlawful if the properties do not meet MEES.
It is therefore important for all customers to start assessing how the regulations will impact on them, and begin planning how they will need to respond.
Virtually all properties built, sold or leased since 2008 require an EPC and will be affected by the upcoming MEES. However, certain exemptions do exist for buildings that are, for example:
- Listed or officially protected, and energy efficiency improvements would unacceptably alter them
- An industrial site, workshop or non-residential agricultural building that uses little energy
- A temporary structure due to be used for two years or less
- Long-term vacant, or due to be demolished
However, EPC exemptions can be complex and subject to certain discretions from local authorities. Customers should therefore always seek direction from specialist energy performance consultants or their local authority to determine how their property portfolio will be affected by MEES.
Landlords claiming an exemption will then need to notify and evidence this to a centralised register.
Penalties and wider impact
Penalties for non-compliance will reflect both the severity and length of infringement.
For example, renting out a non-compliant property for three months or more attracts a penalty of 20% of the property’s rateable value, with a minimum penalty of £10,000 and maximum of £150,000.
In addition to specific financial penalties, non-compliant properties may also suffer from a decrease in value and loss of rental income.
With between a quarter and a third of properties currently receiving an ‘E’ rating or below, a significant proportion of customers may be at risk.
1 April 2018 is the cut-off date for compliance, but customers will need to act now if they are not already doing so.
- We would suggest your customers take a strategic approach in response to the upcoming energy rules:
- Ascertain properties without an EPC and assess whether one will be required (giving reference to the EPC regulations, exemptions, impending MEES dates and your lease renewal cycles). Commission EPCs where needed.
- Identify properties ‘at-risk’ (those with an EPC rating of below ‘E’). Consider commissioning new EPCs to double-check that ratings are accurate before undertaking costly improvements.
- Consult specialists on how to retrofit at-risk properties and achieve minimum energy efficiency standards. Again, be aware that certain exemptions do apply if improvements are not cost effective.
- Look at your greatest income streams, renewal cycles and planned maintenance regimes to prioritise investment and action.
- Update leases and operational procedures to take account of the new regulations and ensure on-going compliance.
- Review your portfolio’s sums insured to avoid underinsurance. In light of the regulations, buildings will need to be reinstated to comply with these minimum energy standards, potentially increasing your properties’ reinstatement values.
Ruth Gilbody, Product Manager at Arbnco, a provider of real estate analysis and improvement software, says: “With MEES now just a year away, landlords, property managers and their advisors need to be acting now to ensure buildings do not pose a risk.
“Not everyone involved in the management of a building has a background in engineering, but the impacts of poor energy performance and the forthcoming MEES legislation will affect all, and informed decisions need to be made.”
For more information on minimum energy efficiency standards, please speak to your local Zurich contact.