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The Government has published its long-awaited response to consultations held in 2019 and 2021 on increasing the minimum energy efficiency standard (MEES) for commercial properties in England and Wales.
Labelled an “interim” response, and with some important detail still to come, the Government has confirmed:
- Energy Performance Certificate (EPC) B from 2031 for commercial buildings over 1,000 square metres: all privately rented commercial buildings over 1,000 square metres in England and Wales will need to have an EPC rating of B or above, where cost effective. This represents a one-year extension from the 2030 deadline originally proposed in the 2021 consultation. Owner-occupied buildings remain outside the scope of the MEES Regulations.
- Smaller buildings stay at EPC E: properties below 1,000 square metres will remain subject to the current EPC E minimum standard, giving SMEs and landlords of smaller assets more time and flexibility to upgrade.
- No interim milestone: there will be no requirement to meet the previously proposed interim milestone of EPC C by 2027.
- Flexibility and exemptions: existing flexibility mechanisms, including the 7-year payback test (under which landlords are only required to make improvements that can be recouped through energy savings within seven years) and exemptions (including the consent exemption, devaluation exemption and new landlord exemption) will continue to apply. In practice, the payback test may limit the impact of the EPC B requirement for certain building types where upgrade costs are disproportionate to achievable energy savings.
The new minimum energy efficiency standard of a B for larger buildings from 2031 will only take effect once secondary legislation is in force. There is no confirmed timetable for the legislation, although the Government intends to introduce it at the earliest opportunity.
Gaps in the Interim Response
One notable omission from the interim response is any reform of the EPC methodology for non-domestic buildings. Commercial EPCs currently provide an ‘asset rating’, based on modelled energy performance, rather than measuring how a building performs in operation. This is widely regarded as a significant limitation, as EPC ratings can diverge materially from actual energy use in practice.
The Government has confirmed that the single carbon-based headline metric used in non-domestic EPCs will remain in place for now, although it is seeking views on whether future reforms should bring the regime more into line with the evolving domestic EPC framework.
Unless and until the underlying methodology is reformed, there is a risk that the proposed EPC B requirement drives improvements in modelled performance without delivering equivalent real-world energy savings.
What should landlords and developers do now?
Landlords and developers in the commercial property sector should:
- Plan strategically: undertake a portfolio-wide stocktake (encompassing assets under development, forward-funded schemes and other stock anticipated to be acquired or constructed in the near future) to confirm current or anticipated EPC ratings, lease expiry dates and the applicability of exemptions.
- Identify potential cost-effective improvement measures, taking into account the payback test and the lead times required for the design, procurement and installation of energy efficiency upgrades.
- Review relevant lease provisions (including access rights, ability to undertake works and EPC requirements) and, for developers, review development agreements and agreements for lease to ensure handover specifications and conditions precedent reflect the new minimum standard. The EPC B requirement should be factored into all new acquisitions and lease negotiations.
- Take action now to ensure properties meet the B rating from 2031, reduce compliance risk and protect asset value. In a market where energy performance is increasingly central to investment decision-making and property valuations, early compliance can mitigate the risk of "brown discounts" on non-compliant assets, as well as the risk of penalties and potential reputational damage in the event of non-compliance.
- Monitor further updates expected from the Government, including its full response to the consultations and implementing legislation and guidance. Whilst the direction of travel is clear, the devil will be in the detail.
Looking ahead
We will continue to monitor developments as the Government brings forward its full consultation response and implementing legislation, and will provide further updates in due course.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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