The new Minimum Energy Efficiency Standard will come into force in April next year, with direct implications for rental income and asset values, writes Simon Clouston of WSP.
Energy Performance Certificates have been required for the sale and letting of commercial and residential property for nearly 10 years. They were introduced to provide greater transparency on the energy performance of buildings and harness the power of the market to drive improved performance. But this has had little impact to date as in most cases the rating achieved has been of little significance.
However, from April 2018 new regulations will prohibit landlords from entering into a new lease, with new or existing tenants, unless the property has at least an E rating for its EPC. This is the new Minimum Energy Efficiency Standard.
Properties that are F or G rated will be deemed “sub-standard” and cannot be let again until they are either upgraded or the landlord successfully applies for an exemption from the regulations.
How many properties could be affected?
The latest Government statistics indicate that in Manchester alone, more than 1,000 commercial properties are currently rated F or G, or 16% of the total. A further 1,000 properties are E rated and some of these will be at risk of slipping down to an F or G rating, particularly if the EPC was obtained several years ago. This is consistent with the picture across the rest of the country.
What should commercial landlords do?
Firstly, landlords should review the EPC ratings of any properties rated F and G, as well as those that currently do not have an EPC rating, prioritising those with a lease event in the next 1 – 2 years.
The good news is that in our experience, the EPC rating of 50% or more of “sub-standard” properties can be improved to an E rating or higher simply by preparing an up-to-date, better quality EPC.
Multi-let offices which are still rated sub-standard even after an EPC will require improvements to shared services or building fabric which are the landlord’s responsibility. The landlord needs to identify the works required, ensure the capital is available to pay for them and then schedule the works to minimise any disruption to their tenants. All of which takes time.
At the moment, the maximum penalty available is £5,000 and any monies raised are returned to the Treasury. The new regulations will increase the maximum penalty to £150,000 per breach and the monies raised will be retained by the local authorities. That will surely encourage closer attention to compliance in the future.
So is the property industry ready?
April 2018 is just around the corner. We know that some businesses are in good shape; they have reviewed the EPC status of their portfolios, they understand where the commercial and compliance risks lie and have plans in place to address them.
However, government data shows that of all the new EPC registrations in Manchester this year, around 13% are still F or G rated. This is barely less than the long-term average of 16%. There is clearly still work to do.
- Simon Clouston is technical director at WSP in Manchester