Energy efficiency top of the landlord’s agenda
I can hardly blame people for greeting even the mere mention of energy efficiency with a reluctant sigh, writes John Russell of Carter Jonas.
A significant number of new measures to enhance efficiency within the built environment have been introduced in recent years.
From Minimum Energy Efficiency Standards (MEES) to the EU Energy Performance of Buildings Directive (EPBD) and Energy Savings Opportunity Scheme (ESOS) Phase 2, to name but a few, there are so many acronyms flying around that I can understand why people might feel a little fatigued.
However, when speaking with colleagues across the commercial teams they have been keen to highlight the benefits and potential opportunities that the measures present to landlords and occupiers, as well as the pitfalls.
The Government’s Clean Growth Strategy, which was recently published by The Department for Business, Energy and Industrial Strategy (BEIS) has the intention of simplifying carbon and energy reporting for business, making it very clear that landlords need to future proof portfolios to protect against a tightening regime that is only going to become more stringent.
The Minimum Energy Efficiency Standards is a good example of a measure that whilst presenting challenges also, with the right planning, presents landlords with a chance to explore new lease and asset management options.
From 1 April 2018, a new legal standard for minimum energy efficiency will apply to rented commercial buildings and domestic privately rented properties. From this date, landlords of non-domestic and domestic privately rented properties within the scope of the MEES regulations must not renew existing tenancies or grant new tenancies, if the building has less than the minimum energy performance certificate (EPC) rating of E unless the landlord registers an exemption.
Landlords are likely to be the most affected parties because the key obligations and restrictions in the MEES Regulations fall on them. The most obvious threat to landlords is the financial cost of upgrading non-compliant buildings and the potential loss of income, if a property cannot be rented out.
There are however opportunities for landlords to engage with tenants to enter so-called “green leases”, where the environmental management and costs of the property, such as energy efficiency improvements and utility bills, are shared for the benefit of both parties.
Landlords could also look to explore the potential to increase asset value and rental value through making energy efficiency improvements and combining these with other retrofit upgrades.
Failure to comply with the requirements of the MEES regulations by renting out a property in breach of the rules carries substantial penalties:-
• For a rental period of less than three months the penalty will be equivalent to 10 per cent of the property’s rateable value, subject to a minimum penalty of £5,000 and a maximum of £50,000
• For rental periods of greater than three months, the penalty rises to 20 per cent of the rateable value, with a minimum penalty of £10,000 and a maximum of £150,000
In light of the above, landlords should act now and seek out advice on how they might be affected by the system. Steps which they should take include:-
• Auditing portfolios to understand which properties are within the scope of MEES regulations and whether exemptions might apply
• Understanding how lease terms, break dates, renewals dates and planned refit periods fit with the MEES timetable
If established that a building or portfolio will be affected by MEES landlords should take measures to produce:-
• A bespoke “Energy Efficiency Plan” for their buildings to implement any necessary energy efficiency improvements, aligned with the building life cycle. Including
- Model EPC rating scenarios based upon various improvement strategies – finding the most cost-effective improvement
- Fully costed, investment-grade proposals for achieving the minimum standards required meeting the seven-year payback test as required by the MEES Regulations
This might seem like a lot of admin, but things will simplify and there is potential for the benefits to outweigh the disadvantages.
Act now and the exercise could also support recommendations for new energy projects, particularly in relation to commercial property, such as solar PV, battery storage and even electric charging points at certain premises. It gets exciting when asset managers start to consider their operations, assets and energy in totality.