The first day of April marked the one-year anniversary of the UK’s Minimum Energy Efficiency Standards (MEES), which established a base energy standard in order to lease or renew a lease.
The regulation states that a property’s Energy Performance Certificates (EPC) could be no lower than an E, with those rated F or G having to be remedied before the transaction can take place. Looking ahead to 2023 the regulations will apply to existing leases too; if a landlord wishes to continue to let a property and it has an EPC, it must be an E rating.
When MEES was launched, it was reported some 200,000-300,000 properties in England and Wales didn’t meet the minimum EPC. A year on, MEES compliance is hardly the new normal for our industry.
We know that about a fifth of properties across the country are not MEES compliant, while evidence from several thousand surveys conducted by our team showed portfolios comprising between 10% and 60% F or G-rated EPCs.
Before we get into why this is significant today, it’s worth understanding two layers of complexity to reported EPC ratings, which can obscure an accurate reading of the wider marketplace.
The first is inconsistency of certification. For instance, in mixed-use, multi-let properties, we have seen instances where the building is given an EPC as a whole, and instances where only the offices have an EPC. From a compliance perspective it is essential that EPCs are available for all areas that require one and that can often mean multiple EPCs are required.
The second difficulty is related to EPCs issued in 2008/09, at the start of certification. Because the requirements that govern and the software that is used to create the EPCs were revised and adjusted in the early years. Well-meaning early adopters received certificates which soon became volatile, with a rating that did not reflect these changes.
Now those certificates are coming up to their 10-year expiry date, ratings can reduce by a band or two, bringing previously D or even C-rated properties into non-compliant territory.
Disrupting deals
Trying to make sense of a building’s EPC and the works required can be challenging on a project-by-project basis. But a swathe of the market is now driving activity which will be affected by MEES, such as owners repurposing retail units for a sale or leasing to new tenants, or funds bolstering cash reserves amid Brexit uncertainty by liquidating assets.
In both instances, it is MEES which threatens to grind these processes to a halt.
Banks and investors are increasingly wary of EPC ratings too, for their future impact on selling on a property. So refinancing can also be impacted by non-compliance, with either denial or less favourable terms resulting from the worst EPCs.
As with so many things, preparation mitigates the risks and costs involved with MEES non-compliance. Landlords and owners are exposed the most when they address MEES at the point of transaction – when it’s most relevant commercially, but hardest to achieve the best solution.
This is because investigative techniques and deep technical knowledge is required to certify and specify improvements to a building and its services.
Often, missing documentation means specialists must liaise with manufacturers and dig into a building’s history to gather the information they need to accurately model performance and recommend improvements.
This process can take weeks to complete. In the midst of a transaction, that’s an opportunity cost of delaying market listings or postponing a deal close.
Higher standards
As a result, the process is usually condensed for speed, with a focus on pulling ratings out of non-compliance but not necessarily to best performance. As a panicked measure, this works to complete a sale.
But it’s a risky strategy when we consider that today’s E rating is not going to remain the minimum standard. The government’s Green Finance Taskforce has already recommended a minimum B-rating enforced by 2035.
With incremental revisions likely in the meantime, owners and landlords face multiple costs to keep pace if they only aim to meet standards, rather than to optimise performance while time is on their side.
Mat Lown is partner and head of sustainability at TFT
