New energy rules – are landlords ready?

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Policymakers in Holyrood and Westminster have taken different approaches to encourage property owners to make their buildings more environmentally friendly.

However, whether your customers own properties in Scotland or England and Wales, they should be aware of new energy performance regulations that are coming into force, firstly in Scotland in September, and then in England and Wales in 2018.

We discuss what these changes will mean for your customers and why the regulations may prove challenging.

Energy performance regulations in Scotland

Scotland’s new energy performance regulations, known as Section 63, come into force on 1 September 2016 (see boxout).

The changes require property owners to produce an Action Plan for Carbon and Energy Performance (ACEP) at the point of marketing a non-domestic building for sale or let, outlining the measures the new owner should take to improve its energy performance. The required works could vary significantly from property to property, but may include changes to lighting, heating, cooling and ventilation systems.

David Melhuish, Director of the Scottish Property Federation, says: “The introduction of Section 63 regulations in Scotland are set to become a key issue for new tenants and landlords. It is important to consider the regulations carefully as there is a variety of eligibility criteria and alternative options for compliance.

“Crucially, landlords and their advisers need to consider carefully the regulations and guidance to ensure they are meeting their obligations, but without inadvertently ‘gold-plating’ the compliance criteria.”

Energy performance regulations in England and Wales

In England and Wales, landlords will need to meet Minimum Energy Efficiency Standards (MEES), which require a building to achieve at least an ‘E’ Energy Performance Certificate rating.

New energy performance regulations: the key points

Scotland

• The Section 63 regulations are applicable at the point of marketing a building for sale or let
• From 1 September 2016, landlords will have to provide new owners and tenants with an Action Plan for Carbon and Energy Performance (ACEP)
• The Scottish regulations have been described as a “softly, softly” approach, as new owners will have three-and-a-half years to implement the ACEP’s recommended works
• Alternatively, owners can opt to record their carbon output by using an ‘operational rating’ basis. Here is a guide that explains how the operational rating basis works
• Further information is available in this S63 Q&A

England and Wales

• Minimum Energy Efficiency Standards will require properties to achieve a minimum ‘E’ rating
• The regulations will apply to new leases and renewals from 1 April 2018
• They will be extended to all privately rented property, including those where a lease is already in place, from 2023. However, they will not apply when a building is marketed for sale
• Certain types of properties, such as listed buildings, will also be exempt from the regulations

Alastair Mant, Head of Sustainability at real estate advisors Bilfinger GVA, says: “One of the key differences is that in England and Wales, the regulations only apply when a letting takes place or there’s a lease renewal, whereas in Scotland, the regulations also apply when there’s a sale of a property.

“However, although the regulations in England and Wales don’t directly affect the sale of buildings, they will have a huge impact, because much of the value of a property relates to its existing or potential rental income.

“If you have a property with an ‘F’ or a ‘G’ rating, and you cannot have tenants, its value will fall significantly.”

Lack of awareness

Bilfinger GVA’s Green to Gold report identifies that nearly half (43%) of property portfolio managers have not yet assessed their portfolio’s risk profile in relation to MEES, as the general level of awareness of MEES amongst property owners is generally low.

There will be financial penalties – in Scotland, England and Wales – for letting out properties that do not comply with the relevant regulations.

Alastair says: “Of greater concern to many will be the decline in the value of their portfolios, or the potential loss of reputation should they fail to achieve compliance.”

What your customers should consider next

“The first thing your customers should consider doing is review the level of risk in their portfolios,” says Alastair.

“Do they know what the Energy Performance Certificate rating is for each property? Do they know when they will need a new EPC, and how that fits in with the leasing cycle and the planned maintenance cycle?”

It would be a dangerous strategy for property owners to wait until 2018 to review their portfolios, especially larger portfolio owners who may have hundreds or even thousands of properties.”
Alastair Mant, Head of Sustainability, Bilfinger GVA

MEES also presents a challenge for customers with smaller portfolios.

Alastair says: “Those with just a few commercial units in their portfolio are less likely to have consultants or in-house sustainability teams advising them, and these smaller portfolio holders tend to be more likely to have properties rated ‘F’ or ‘G’.” Therefore such customers may need to consider further guidance on how their properties can be adapted to comply with MEES.

An opportunity for brokers and customer collaboration

These new regulations present an opportunity to work closely with your customers to ensure that they are aware of the dangers of non-compliance, and the potential insurance implications. In the event of a substantial loss, it might cost significantly more to reinstate a property in a way that improves its energy performance to meet EPC requirements. The cost of reinstatement could exceed the sum insured, leaving your customers at risk of underinsurance.

Proactively working with your customer to manage their portfolio risks at an early stage will help customers to develop an adaptation plan to manage the process more effectively and sustainably, and avoid last minute adaptations.

For more information, or to discuss any aspect of this article further, speak to your local Zurich contact.