At a glance
- On 1 April 2018, new rules came into force making it unlawful to let properties in England and Wales below a certain energy efficiency rating
- The new rules have increased the cap on domestic energy efficient improvements to £3,500
- 17% of commercial EPCs are currently rated E and are therefore at risk of falling below the minimum standard
- These requirements will extend to all current leases and apply to all domestic private rented properties in England and Wales from April 2020, and to all non-domestic from April 2023
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This is an updated version of the original article, posted 3rd April 2017.
From 1 April 2018 it became 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 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 now applies to existing properties.
A new minimum standard – ‘E’ rating
Following several years of consultation, the ‘Minimum Energy Efficiency Standard’ (MEES), was confirmed by the Department for Business, Energy and Industrial Strategy (BEIS). From 1 April 2018 properties need to achieve a minimum of an ‘E’ rating on their energy performance certificate (EPC).
2018 – new leases and renewals
Since 1 April 2018 it is 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
These requirements will apply to all private rented properties in England and Wales, even where there has been no change in tenancy arrangements:
•from 1 April 2020 for domestic properties
•from 1 April 2023 for non-domestic properties
From these 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 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
- An amendment to the legislation came into force from 1st April 2019 which removed the ‘no cost to landlord’ domestic exemption. It now requires domestic landlords to spend up to £3,500 to improve the property to a minimum E rating.
- Non-domestic landlords can apply for an exemption if the cost of installing energy-saving measures to bring it up to a minimum rating outweigh the expected savings over a seven year period.
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.
Every local weights and mesaures authority acts as the enforcment authority for the area. The enforcement of the standards falls under trading standards or environmental health.
In Spring 2019 BEIS launched a twelve month private rented sector enforcement pilot, commencing in eight local authorities, to encourage compliance, support tennants and increase enforcement amongst domestic and non-domestic properties. The results of this pilot will be published in Spring 2020.
Data released by the Ministry for Communities, Housing and Local Government in January 2019 listed approximately a quarter of properties receiving an E rating or below. Of those, 17% were lodged as an E rating and were still at risk of non-compliance.
EPCs are calculated using the Simplified Building Energy Model (SBEM), the Government approved energy modelling tool. This receives regular version updates which can significantly affect the EPC rating. A study by arbnco in 2018 found that almost 20% of commercial real estate on its platform fell into a lower Energy Performance Certificate (EPC) category upon re-simulation when using the latest version of SBEM. This could mean that if a property that currently complies with MEES gets a new EPC, it could fall into the F&G rating due to the latest version of SBEM.
Since the introduction of the legislation, just under 70,000 EPCs were lodged and only 4% of those were rated F or G – compare that to 2016, where 13% were F or G out of 67,514 lodged.
1 April 2020 is the cut-off date for compliance for domestic private rented properties, 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.
Stephen Preece, business development director at arbnco, which develops software that helps to improve energy efficiency in commercial real estate said:
“The solutions to complying with MEES exist, and improving the energy performance across a property portfolio does not need to be as challenging as it initially seems. The key element to compliance is property managers making full use of the building data they posses. Technology platforms can analyse RPC data and it can then be used to make quicker, more informed decisions on improvement strategies, building priorities, and the carbon and cost savings that could be achieved.”
“Ultimately, we need to shift the mindset away from seeing EPCs as a reactive tick-box exercise, towards a proactive practice that can drive innovation and improve energy efficiency in the UK’s commercial property.”
For more information on minimum energy efficiency standards, please speak to your local Zurich contact.