The proposed Minimum Energy Efficiency Standard (MEES) legislation in England and Wales was placed before parliament last month. It will require all properties to achieve a minimum energy performance certificate (EPC) rating of E by April 2018 before a lease event can take place.
With around 18% of the property market in England and Wales currently below this level, this legislation will have an impact on both occupiers and landlords. Given the relatively short timescales involved, portfolio assessment is required imminently.
For the first time, fines for non-compliance will be directly linked to rateable value, with between 10%-20% of rateable value capped at £150,000. Depending upon the transaction, the impact of poorly performing properties will potentially affect the balance sheet of either occupiers or investors.
The proposed legislation applies to lease renewals and extensions as well as all new leases. Sections of the market previously exempt from all EPC obligations are now captured, opening up a whole new area of lease negotiation between the landlord and its tenants with regards to improvements.
Properties which do not have a lease event in the short to medium term will also be impacted by a back-stop date of April 2023. Such a property will need to demonstrate compliance irrespective of lease activity. This is intended to force properties under long leasehold arrangements to consider and implement energy efficiency irrespective of a transaction.
A number of caveats ensure that improvements are not forced upon properties that are not cost effective or agreed by all interested parties. The key exemptions deemed fair and reasonable under most scenarios are:
- Return on investment – any improvement initiative must be cost effective and deliver a payback of less than seven years
- Valuation – proposed improvements must not negatively impact the value of the asset by more than 5%
- Third party consent – improvements can only be carried out if agreed by all relevant parties (tenants and landlords)
If it can be demonstrated that a property is exempt under any of the above conditions then it would still be necessary to formally declare this and submit supporting evidence to a central register. As such all property portfolios should be reviewed to assess the correct action plan for each asset to ensure that they are in a positive position before the 2018 deadline.
Graeme Murray is head of sustainable engineering, building consultancy at CBRE
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