Recent announcements have seen the UK Government change direction on its previous commitments towards achieving net zero. Whilst this has obvious environmental implications, there are a number of factors that are particularly relevant for owners and occupiers of commercial properties.
Arguably, the most significant of these is the scrapping of previous targets in relation to MEES (Minimum Energy Efficiency Standards) for rental properties.
Under the existing MEES requirements, landlords of commercial properties in England and Wales are prohibited from granting new leases or (since April 1, 2023) continuing to let existing properties unless the property in question has an energy efficiency rating of E or higher (there are some exemptions to this). The consequence of failing to comply is a financial penalty and publication on a register of non-compliance.
Anticipated new regime
Landlords had been expecting a new requirement to achieve an energy efficiency rating of C by 2025 for private rental properties and 2028 for PRS (private rented sector) properties. The proposed penalty for failing to achieve this was expected to be £30,000 from 2025. In an unexpected announcement, this has now been removed entirely and landlords will not be reprimanded if they fail to upgrade their properties to achieve this level of energy efficiency.
The UK Government has justified this change on the basis of moving towards net zero in a more realistic and affordable manner. Whilst there may be some merit to this approach when set against the current cost-of-living challenges and financial pressures, on balance the unexpected change is unhelpful for landlords. The British Property Federation had already commented in August 2023 that the Government’s lack of certainty and clarity on this topic risked impacting investment and delaying the sector’s transition to net zero. Indeed, despite undertaking a consultation in 2021 on introducing new thresholds for commercial properties, the Government has yet to publish its report. In view of the latest announcements, it is now questionable whether they will do so at all, and this does not assist landlords seeking clarity on their MEES obligations.
Diluting landlord obligations to improve energy efficiency may also result in the costs associated with poorly insulated properties being passed down through heating bills to tenants who can least afford it. This is likely to have a disproportionate impact on lower income tenants and tenants of social housing properties who may already be facing increasing demands on their household budgets. Kate Henderson, Chief Executive of the National Housing Federation, has commented that the Government’s new position on MEES is ‘hugely disappointing’ as improving the energy efficiency of properties ‘would save social housing tenants on average 40% on heating bills.’
This all said, responsible landlords may still decide to undertake remediation and insulation works regardless of the UK Government’s announcements. Doing so, however, will be at their own cost and without any certainty as to the longer-term decision making in relation to MEES.
The correct measure?
Another issue which the UK Government has yet to fully address is whether Energy Performance Certificates (through which MEES are measured) are the optimum tool for understanding the in-use energy performance of buildings. The same consultation in 2021 mentioned above did propose the introduc- tion of a performance-based rating scheme for large commercial and industrial buildings. The British Property Federation has been calling for such a scheme but it remains to be seen if this will be taken forward.
Investment and funding
It will also be very interesting to see what impact the UK Government’s announcements may have for sustainable lending and ESG funds. This is an area that has grown hugely in recent years. In a market with rising financial pressures and a declining housing stock, many registered providers and commercial landlords are looking to ESG funds as an alternative form of investment. Such investors will, however, want to see that strategies are being implemented with a focus on achieving net zero. Against such a context, landlords may feel an obligation to achieve much higher energy efficiency ratings than they are legally required to.
In conclusion, whilst dropping the requirement to achieve an energy efficiency minimum rating of C may be driven by an awareness of financial pressures and the cost-of-living crisis, the impact on the sector is less than desirable. Landlords, in particular, are faced with very little certainty as to their longer- term obligations in relation to MEES and may have incurred costs in bringing their properties up to a C standard when this is now no longer legally required. In practice, however, it is possible that some landlords may still decide to improve the energy efficiency of their properties to meet not only the expectations of their own tenants but also societal demands and the needs of their investors.
It remains to be seen, therefore, whether the UK Government’s change of direction in relation to MEES will have an actual impact on the quality and energy efficiency of housing stock in England and Wales.
Lucy Lord, Commercial Property Partner at Howes Percival said:
“The current market remains resilient and we have strengthened our Commercial Property offering, thanks to the arrival of our new Senior Associate Charlotte Harrison, and the return of Commercial Property Partner Alexandra Kirkwood, who returns from maternity leave. Both have a proven track record and bring a wealth of experience in the commercial property sector, having worked with a broad range of clients.
“With these two highly experienced professionals on board, we’re confident that we can continue to deliver the exceptional service and expertise that our clients have come to expect from us.”
For more information on Howes Percival’s corporate advisory services visit: www.howespercival.com/services/commercial-property/
