Improving energy efficiency of commercial property in England and Wales

The consultations, which were published in mid-March, propose a new performance-based policy framework in large commercial and industrial buildings; as well as more stringent minimum energy efficiency standards (MEES) for non-domestic buildings in the private rented sector.

If the legally binding emissions reductions targets set by the government under the 2008 Climate Change Act are to be met, it is likely regulation will follow to implement these proposals within the timescales envisaged in the consultations. Landlords of non-residential properties need to think about taking steps now if they are to achieve the minimum Energy Performance Certificate bands targeted by the government, and will be watching closely as the proposed new ratings system for large commercial and industrial buildings develops.

Implementation of the EPC B future target

The 2015 Energy Efficiency (Private Rented Property) (England and Wales) Regulations (MEES Regulations) set minimum standards for Energy Performance Certificates (EPCs) for private rented properties in England and Wales. All new tenancies must achieve a minimum EPC rating of an E as of 1 May 2018, and this will be widened from 1 April 2023 to capture all let properties even if there has been no change in tenant. It will be an offence to continue to let properties that do not achieve the E threshold unless a valid exemption applies. 

In 2019, the government began a consultation on setting a trajectory for non-residential properties to achieve an EPC threshold of B or the highest EPC band that a property could reach cost-effectively by 2030. The outcome of that consultation showed significant support for the policy. and the government therefore confirmed the EPC B trajectory in its Energy White Paper in December 2020.

The latest consultation explores the proposed framework to implement the EPC B rating and seeks to address some of the main issues identified in the first consultation. The consultation is particularly relevant to landlords of non-residential property but also contains proposals that affect tenants, EPC assessors and local authorities that will enforce the scheme. There is a separate consultation for residential property, which is being undertaken at the same time but which currently proposes different EPC targets and timescales.

The government’s response to both consultations is due later in 2021 but, given the announcements in the Energy White Paper, it seems likely that the government will introduce regulations to implement a target of an EPC B by 2030 and interim milestones.

At the moment there are a number of areas where landlords and tenants will require greater clarification. These include, for example, whether an EPC B in 2030 look will the same as an EPC B does today, and whether the range of current exemptions will remain broadly the same. It is hoped that greater detail on those requirements should come out of the latest consultation.

In the meantime there are steps that landlords can take now to ensure that they are best prepared for the changes. These include reviewing all existing properties to understand which properties are unlikely to meet an increased EPC threshold and the work that may be required to bring those properties up to the required threshold.

Milestones and compliance windows

The consultation envisages a phased implementation with an interim milestone of an EPC C rating by 2027 leading to an EPC B rating by 2030. The intention behind having an interim milestone is to encourage landlords to take action before 2029-30, while providing some flexibility to allow landlords to plan improvements into tenancy cycles.

Each milestone would follow two year ‘compliance windows’: 1 April 2025 – 31 March 2027 for an EPC C and 1 April 2028 - 31 March 2030 for an EPC B. At the beginning of each window, landlords will have to present a valid EPC. By the end of each window, landlords will need to show that they have achieved the relevant threshold or have registered an exemption, and any exemptions would need to be refreshed at the start of each compliance window. The intention is that, even where an exemption is registered, landlords should demonstrate that the building has achieved the highest EPC band that is possible to deliver cost-effectively.

The government has made it clear that landlords are not required to follow a two-stage process to a C and then a B and, if it is more cost-effective and minimises disruption to do one round of improvements, that is what landlords should do.

Limitations and exemptions

The consultation seeks to address some of the specific concerns previously raised by the property industry.  For example:

• landlords are not required to carry out improvement works if the cost of the changes required to meet the MEES threshold is not recoverable within a seven-year ‘payback’ period. The consultation confirms that the government is not proposing to change the length of the payback period but it is looking to simplify the process of working out the payback by replacing the current requirement to obtain three quotes as evidence with a simpler payback calculator
• greater clarity is required around the treatment of older buildings and. in particular, listed buildings. The consultation proposes that all let buildings, including listed buildings, should be required to have an EPC. Landlords will, however, be able to apply from an exemption from the MEES thresholds where those cannot be reached - for example, because modern construction techniques are inappropriate to the age of the building or the works required to meet the relevant EPC threshold would not be acceptable to the planning authority. A separate review is being undertaken by the Government to make recommendations more tailored to older properties by the end of 2021
• landlords had also highlighted that assessing EPCs at the point of letting does not work for properties that are traditionally let in ‘shell and core’ state. In order to meet the required threshold, landlords were having to install measures that a tenant immediately wanted to remove or were having to structure lettings using agreements for lease to fund fit works out before the premises were let.To try and address this, the consultation proposes a six-month exemption for shell and core properties to allow fit out works to be undertaken post-let.

Central records

The consultation proposes a new central register - the new PRS Exemptions and Compliance Database. Landlords will be required to submit details of any EPCs and exemptions to the database.

Enforcement

The intention of having fixed dates of 1 April 2028 and 1 April 2030 is to help provide a clear cut off for enforcement. Landlords will remain liable for a maximum fine of up to £150,000 if a property has been let in breach of the MEES regulations.

For more minor breaches there is no change proposed to the current maximum fine of £5,000 but the list of breaches will be expanded to reflect the proposed changes. The consultation makes it clear that the £5,000 penalty should apply to each and every breach that occurs (for example, a failure to lodge a copy of a valid EPC by 1 April 2025 would be one breach and a failure to lodge a further improvement EPC or an exemption by 1 April 2027 in relation to the same property would be a further breach). A publication penalty may also be imposed which would include publication of details of the breach (property address and the penalty imposed) on the exemptions register.

Landlord and tenant responsibility

Currently, responsibility for compliance with the MEES Regulations lies solely with landlords.  The consultation recognises that this does not encourage a collaborative approach between landlords and tenants to make energy efficiency improvements. The government is therefore seeking responses on whether new legislation should be introduced to impose duties on tenants in relation to compliance and to co-operate with landlords, and what these duties should consist of. For example, a tenant could be required to act reasonably if a landlord needs access to carry out work to improve the energy efficiency of the premises.

Performance ratings for large industrial and commercial buildings

The UK’s largest industrial and commercial buildings account for a third of total emissions from all buildings. The government believes that these buildings pose a significant challenge to meeting the net-zero carbon GHG emissions target by 2050. The evidence is that there is little correlation between the EPC for a building - which measures theoretical energy performance - and the building’s actual energy performance. The Climate Change Committee recommended performance-based ratings some time ago and this consultation is the first step towards this.

The real estate sector has been calling for such a rating for a long time so this consultation is welcome.

The desired outcomes from the new rating system are reductions in energy use, which the Government estimates need to reduce 30% by 2030 against 2015 levels, and emissions; and ensuring these buildings are prepared for the installation of clean heat over the 2020s and beyond. The way in which a building is heated will significantly impact its energy performance and will need to be decarbonised.

The proposed new rating system draws heavily on the successful Australian NABERS rating system, and will apply to all commercial and industrial buildings, not just those which are let or sold. Its main features are:

• it will apply only to buildings which are more than 1000m2, although this will be reviewed as sectors join the scheme
• it will be introduced on a sector by sector basis with the benchmarks for ratings tailored to each sector or building type and will take account not just of energy use but also operational hours and climate and location data. The relevant benchmarks for each sector will be developed with that sector and industry experts and updated regularly. Buildings will be benchmarked against similar buildings and against a net-zero trajectory
• ·owners and single tenants of whole buildings will be required to obtain an annual rating and from the second year of joining the scheme will be required to disclose that rating online
• two mandatory rating types are proposed. Where a building is multi-tenanted the owner will have to obtain a ‘base rating’ i.e. a rating which covers central services and areas and where services are provided directly to tenants such as heating/cooling and hot water, that energy will be included. An owner occupier or a single tenant will have to obtain a ‘whole building rating’ which will cover all energy for all services. In addition, there is a proposal to introduce a voluntary tenant rating for tenants with demises of over 1000m2
• there will be no initial regulatory obligation to improve the rating year on year but instead, if reputational factors alone do not lead to improvements in performance based ratings, the Government will consider further measures which might include fiscal incentives or penalties or regulatory interventions which might include setting minimum standards
• the preferred metric for the ratings is “kilowatt hour Electricity Equivalent” which takes account of both energy use and carbon emissions so that higher ratings cannot be obtained simply by virtue of grid decarbonisation
• the rating presentation is likely to be in the form of a six star rating system like NABERS
• the process for joining the scheme will involve an onboarding process where data about the building is collected and a physical inspection done, that data is then compared to the applicable benchmarks and the annual performance-based rating is produced. The rating will not come with any “recommendations report” and it is felt the market can provide advice on how to improve ratings. Following the initial year of joining the scheme, subsequent ratings will be assessed through desktop audits based on information submitted, with site visits only required every four years
• ·no exemptions from the scheme are proposed save for reasons related to national security
• enforcement options considered are publication of non-compliance and fines. Current research will be considered in deciding the preferred approach

It is proposed that the office sector will be in phase one of the scheme with two subsequent phases bringing in buildings from other sectors. Phase one is proposed to commence in 2022-23 with mandatory ratings, followed in 2023-24 with mandatory disclosure of ratings. 

A second consultation dealing with the detail of the office sector performance ratings (34-page / 511KB PDF) was issued at the same time. This expands on a proposal, made in the interest of cutting regulatory obligations for building owners/tenants, to remove the need for compliance with MEES regulations where a performance-based rating exists. This would involve agreeing with the scheme administrator the required improvements to achieve an EPC grade B and then proving those improvements have been carried out by 2030 and being subject to the same level of fines as apply to breach of the MEES regulations. It is arguable this introduces unnecessary complexity and it would be easier simply to leave building owners to comply with the MEES regulations.

This second consultation also tackles the issue of mixed-use buildings and proposes that if the majority of the floor area is being used as office space and the building as a whole is over 1000m2 it would fall within the scope of the scheme.

The consultation discusses detail about how to separately account for landlord and tenant energy use and how to deal with non office areas in office buildings.

It will be important than any final regulations deal clearly with the treatment of mixed use buildings, of multi sub-tenanted buildings, and the split of energy responsibility between landlords and tenants. Whilst the MEES consultation contains a suggestion for the imposition of some obligations on tenants in relation to cooperation and compliance with MEES regulations, the Performance-Based Rating consultation does not do the same. It is important for tenants to be incentivised to reduce energy consumption over which they have control and it is to be hoped the proposed voluntary tenant rating will be brought in and even be made mandatory sooner rather than later.