Business Clarity Provided - UK Minimum Energy Efficiency Standard Legislation Update

The proposed Minimum Energy Efficiency Standard (MEES) legislation in England & Wales was placed before parliament this week. The proposed legislation will require all properties to achieve a minimum 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 sitting below this level, this legislation will have an impact on both occupiers and landlords. Furthermore, given the relatively short timescales involved, portfolio assessment is required imminently.    For the first time, the fines for non-compliance will be directly linked to the rateable value of the asset with a range of between 10%-20% of rateable value capped at £150,000. Depending upon the nature of the transaction, the impact of poorly performing properties will potentially affect  the balance sheet of either occupiers or investors.   In addition, the proposed legislation includes powers to apply the minimum standard to lease renewals and extensions as well as all new leases. This means new sections of the market that had previously been exempt from all EPC obligations are now captured.  This inclusion will open up a whole new area of lease negotiation between the landlord and its tenants with regards carrying out improvements to protect the value of poorly performing assets.   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 that has been included. Such a property will need to demonstrate compliance irrespective of any lease activity.  This is intended to force those properties under long leasehold arrangements to consider, and implement, energy efficiency irrespective of a transaction taking place.   It should be noted that there are a number of caveats within the proposed legislation to ensure that improvements are not forced upon properties that are not cost effective or agreed by all interested parties.  The key exemptions include the following rules which the government has deemed to be fair and reasonable under most scenarios:

• Return on investment – any improvement initiative must be cost effective and deliver a payback of less than 7 years
• Valuation – the proposed improvements must not negatively impact the value of the asset by more than 5%
• Third party consent – the improvements can only be carried out if agreed by all relevant parties (i.e. tenants and landlords)

In the event that 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 to the government agency and submit supporting evidence to a central register.  As such all property portfolios need 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.