Adam Leach examines the implications landlords, tenants and facilities managers face if they fail to meet the Minimum Energy Efficiency Standards (MEES).
5 March 2018 | Adam Leach
The 1st of April is well known as a day for practical jokes, but for any landlord found to have fallen short of energy efficiency ratings and looking to let a building on that day, it will be no laughing matter.
As part of the Energy Efficiency (Private Rented Sector) (England and Wales) Regulations 2015, the Minimum Energy Efficiency Standards (MEES) will make it unlawful for any residential or commercial property with an Energy Performance Certificate (EPC) rating of 'F' or 'G' to be let, unless granted an exemption.
For landlords, or tenants looking to sublet, the implications are clear: no letting or renewals until the requirements are met, or face a fine of up to £150,000 for each occasion. And the possible implications go beyond that. By not adhering to the requirements, the valuation of a property could suffer from diminished marketability, rent reviews could be affected, and there may also be implications for dilapidations assessments.
Taken all together, and provided none of the exemptions, such as the lease running for less than six months or there being no requirement for an EPC (as is the case with some listed buildings), and the rapidly approaching deadline is a strong call to action for landlords, tenants, and FMs to get their house in order. But despite the fact that the regulations have been trailed for several years - it still appears that many in the space are dragging their feet in terms of preparedness.
Michael Barlow, a partner at Burges Salmon, says: "A lot of people, particularly from a client perspective, haven't grasped it."
For Barlow, and others in the sector who report a similar situation, a large part of this hesitation arises from a suspicion that the regulations may be reversed.
"Even though it was seen as a fairly draconian measure when first announced, because of the government's position and Brexit and the deregulatory agenda, there is quite often a view that even though the regulations are coming in, it might actually all be repealed," he says.
But although previous government attempts to incentivise greater energy efficiency - such as the Green
Deal - have dulled relatively quickly, there are no signs that MEES will go the same way.
But while some have been slow to prepare for the regulations, others are ready and have taken the necessary steps to make sure that they don't fall foul of them. The first step in being prepared is to check the EPC ratings of all of your buildings.
Taking a strategic approach
Initially, any building found to have an EPC rating of F or G will automatically be in need of improvements to meet the minimum requirement of an E rating. But it is also advised that any with an existing E are also assessed on the grounds of the quality of the original EPC in case there is a risk that they may have dropped to an F or G because the calculation methodology was altered two years ago.
Discussing a client who has taken action ahead of the MEES deadline, Barlow says: "We've picked up instruction from a large household-name charity that has a lot of cottages nationally in rural areas that have a low EPC rating. They're taking it seriously and have a very strategic approach to it and are seeking to do the right thing by acknowledging why these regulations have come in and to improve the properties in a strategic way."
Key to taking this strategic approach to complying with the regulations is identifying the current state of play by checking the existing EPC ratings. But once that is done it is equally important to decide on where you want things to be. Central to this is deciding whether to simply comply to the minimum requirement of E or to aim higher.
Andrew Cooper, a director at EDGE and consultant engineer, says companies are taking a range of approaches on whether to just take action on those with lower-than-required ratings or on their portfolios as a whole.
"Some have taken the approach of 'we'll get EPCs on everything', with British Land being an example of that. But others have taken a very different approach of getting EPCs as and when they are required."
But his experience so far shows that when such businesses decide to take action they are typically aiming to exceed the minimum requirements.
"As and when assets are being refurbished, then, certainly in terms of the clients we are dealing with, there is an absolute expectation that the EPC rating will be significantly better than an E," says Cooper. "At the moment, everybody seems to want a B, which is very good, and they'll settle for a C. They are going some way past the requirement."
Against this backdrop of many firms delaying decisions until almost the last possible moment (it is worth noting that while the rules come in to force on 1st April the date at which they affect a building is dictated by when a new lease is to be signed) and a seemingly smaller proportion of those who are, or have already taken action, what is it that is being done to improve the EPC ratings and meet the requirements?
In this area, the main technologies being used to improve the efficiency of buildings are air source heat pumps and to a lesser degree, due to their limited application potential in office buildings, ground source heat pumps.
"Technically, one of the best things you can do, because of the NCM [National Calculation Methodology], is put in air source heat pumps and therefore we are seeing lots and lots of air source heat pumps," says Cooper. "So relatively efficient heat pumps, but less efficient than ground source heat pumps."
As a large proportion of the buildings rating an F or G EPC rating are old properties that have not been refurbished for some time, the replacement of an old, inefficient heating system with an air source heat pump, which uses external heat to provide internal heat, can make significant gains and may even move EPC rating up to the accepted level. In addition to air source heat pumps, a range of other heating systems and boilers are also being installed to improve efficiency, such as biomass-based boilers, micro-combined heat and power and radiant heating systems.
Serving to strengthen any plant improvements, or as an independent solution, improving the thermal efficiency of a property by minimising the amount of heat lost is also a key method of improving an EPC rating. Upgrading or replacing building insulation offers significant potential in this area and will probably prove a popular choice to building owners in response to MEES.
Another big change likely to be made in response to MEES is lighting, as building owners opt to switch to more efficient LED-based systems to capitalise on their much greater efficiency levels.
"Five years ago you would get excited if you saw LED around a building, but nowadays you'd be surprised not to see LED," says Cooper. It works very well if you have the lighting design data."
Paul Bennett, executive chairman at energy efficiency consultancy BSSEC, reckons businesses are likely to adopt a mix of these solutions to meet their requirements. But a key deciding factor will be how easy they are to implement within a building that is occupied. "The solutions will have to be quite straightforward because they will be occupied buildings and you don't want to do a deep refurbishment. I think there are going to be sensitivities and practicalities that will drive the solutions."
Those practicalities, particularly in relation to disruption to the normal operation of buildings while works are completed, can be mitigated to ensure that both landlord and tenant's requirements are factored in. But one issue that may be trickier to handle is deciding who pays for the work or weighs in on what changes should be made.
The matter at the heart of this is that although the landlord is responsible - and liable - for non-compliance, and therefore ultimately required to cover the costs, it is the tenant who reaps the greatest benefits from the reduced energy bill. As a result, both parties have stakes and interest in what work is carried out and to what degree the efficiency is improved. Bennett thinks this issue is likely to have a big impact.
"There's a really tricky bit, which is who pays? Should it be the landlord or the customer who picks up the bill? So the FM needs to be mindful of that and also be mindful of the fact that by doing the work there is a reduced operational cost."
Financing works through future savings
In terms of addressing this landlord-and-tenant issue, it may be that that reduced operational cost is the answer. Over recent years, owing largely to the increased value placed on energy efficiency by both government and industry, innovative financing options have been developed that enable works to be carried out and paid for through the future savings they deliver.
Solutions such as these are seen as offering significant potential in the context of MEES.
"We know of cases where the landlord will say, 'We've got to do it, there's a saving to be had, and we're going to go beyond an E to a B and make it a really efficient building and we'll use some of those savings to pay for the cost of the installation work'," says Cooper.
Similarly, Barlow has also seen a rise in clients using such options, with a number opting for energy performance contracting, where the costs of work are guaranteed to be returned through the savings delivered through improved efficiency.
Another mechanism proving popular and which offers a method of overcoming the issue of who pays and who benefits is the so-called 'green lease', whereby landlord and tenant agree to jointly work to improve the efficiency of operations by stipulating facts such as temperature settings and operating hours, while also offering shared financial incentives to both parties to maximise performance. These agreements, says Barlow, are well suited to the MEES requirements.
"A green lease is a device to get round that dichotomy. So it has a joint protocol with a joint incentive to try and improve things."
With these financing options in place and an agreement between the landlord and tenant covering responsibilities, coupled with a clear understanding of which buildings require improved ratings and what work will best enable that improvement, FMs are well placed to make sure the MEES regulations do not negatively affect operations or result in fines. Fail to do so, however, and nobody will be laughing.