Will an EPC rating of B be required by 2030? Currently, this is the government's favoured approach

Summary

The government is consulting on a proposed future trajectory for raising the Minimum Energy Efficiency Standard (MEES) for let commercial buildings (referred to as non-domestic private rented buildings). Its favoured approach is raising the minimum EPC rating to B by 1 April 2030 provided the measures required to meet this are cost effective. The announcement comes as part of the government's package of measures to reduce carbon emissions as it has committed to support businesses in reducing their energy use by at least 20% by 2030. It is part of the UK's commitment to bring all greenhouse gas emissions to net zero by 2050.

The full consultation document can be seen here. The consultation runs until 7 January 2020. Responses should be submitted online. Those involved in the real estate, construction and energy sectors may be interested to respond. The associated Impact Assessment can be seen here.

The current position

Since 1 April 2018, the Energy Efficiency (Private Rented Property) (England and Wales) Regulations 2015 (MEES Regulations) have made it unlawful for landlords to grant a new tenancy of a property with an EPC rating of below E (known as a sub-standard property), unless an exemption applies and has been validly registered. From 1 April 2023, it will be unlawful for a landlord of sub-standard commercial premises to continue to let those premises unless an exemption applies and has been validly registered (and from 1 April 2020 for residential premises).

What will change?

The consultation is seeking views on two potential options:

• The preferred option is to raise the minimum EPC rating from E to B so that all non-domestic privately rented buildings achieve a minimum energy efficiency standard of EPC B by 1 April 2030, provided the measure or package of measures required to reach an EPC B prove cost effective. The government's modelling suggests that this would bring 85% of buildings into scope and would require an investment cost of approximately £5 billion between now and 2030. The average payback time on that investment would be four to five years.
• The alternative option is to raise the minimum EPC rating from E to C so that all non-domestic privately rented buildings reach an EPC C by1 April 2030 if cost effective. This would bring only 42% of buildings into scope and would require a reduced investment cost of £1.5 billion. The average payback time on that investment would be three years.

Government modelling suggests that 64% of buildings will be able to reach a B rating, with 20% failing to meet a B rating, but able to reach a C rating. The remaining 17% would be unable to reach a C rating.

Whichever option is adopted, it is proposed that the existing exemptions would continue to apply. The most important of these is that landlords are only required to carry out works that are cost-effective, meaning that the measure achieves a payback of seven years or less. This test is met if the expected value of savings on energy bills over a seven-year period is equal to or greater than the cost of the measure. If this test is not met, landlords are able to register an exemption that is valid for five years.

One implementation date or incremental milestones?

The consultation provides two options for implementing the tighter MEES requirement:

• The first option is to introduce incremental milestones to 2030 (i.e. a gradual increase of the standard until it reaches, for example, a D by 2024, C by 2027 and B by 2030 ). The objective here is to seek early action by landlords and obtain a greater positive impact on carbon and energy savings;
• The second option is a single implementation date of 2030, by which time landlords need to meet a rating of B (or C), albeit other incentives (financial and non-financial) may be introduced to incentivise landlords to carry out works earlier than legally necessary. 

If the single implementation option was adopted, it would be unlawful to continue to let any non-domestic buildings that had not reached a B or C level (depending on which was adopted) after 31 March 2030. The existing exemptions would still apply so, if, for example, requisite works did not satisfy the seven year payback test, they would not need to be done. It is likely that a large number of landlords would need to register exemptions given the percentage of building stock that would be affected by the increase in the minimum requirement to a B or C rating.

It could be argued that having one 'drop dead' date may lead landlords to delay in carrying out energy efficiency works. Why do it now when you could wait until 2030? A series of deadlines in the run up to 2030 may act as a catalyst and place less of a burden on suppliers.

Other landlord/tenant issues raised in the consultation

As is currently the case, landlords must ensure that the premises meet the minimum energy efficiency requirements before letting them, otherwise the landlord will be in breach of the MEES Regulations. The consultation acknowledges that this can be an issue in some sectors, particularly the retail sector, although it is not specifically confined to retail. Two issues are raised:

• the landlord may have to install measures to bring the premises up to the required EPC rating before granting the lease. If the landlord has to spend money to improve the premises to the required level, it is likely to pass this expenditure on to the tenant by way of an increased rent. This problem will become more widespread when the minimum energy rating is increased (whether that is to C or B). The government anticipates that landlords will recoup their costs through enhanced rental values that reflect better buildings with lower outgoings and through increased property values, but acknowledges that has not really happened to date;
• the tenant's fit out could reduce the EPC rating of the premises, putting the landlord at risk of breaching the prohibition on continuing to let a sub-standard property. This is already acknowledged as a problem in the market and is likely to become more widespread when the minimum rating is increased.

The consultation seeks views on how the market can overcome situations where the tenant has fit-out requirements and is willing to fund the improvement of the building at the start of the tenancy.

What else is the government doing?

Government response to the Committee on Climate Change (CCC) 

Following the publication of the CCC’s 2019 progress report (Reducing UK Emissions) to government in July of this year, the government has published its response to the report and associated recommendations. This can be seen in full here. Headline commitments include:

• The government will publish a heat decarbonisation policy roadmap in 2020. This will set out the programme of work required to enable key strategic decisions in the mid-2020s on how the UK achieves the mass transition to low-carbon heat in buildings. 
• The government has launched a consultation on the introduction of a "Future Homes Standard" for England, to be operable from 2025.The aim is to ensure that new build homes in England will be future-proofed with low carbon heating and world- leading levels of energy efficiency and to strengthen Parts L and F of the Building Regulations for new build homes.
• A similar consultation for strengthening Part L of the Building Regulations will be launched for commercial (non-domestic) buildings (existing and new) later this year.
• Further consultation on the technical detail, guidance and impact of the proposed Future Homes Standard is to be published in 2024 (following a period of research), albeit that the current consultation includes an outline of the expected Standard and a roadmap to achieving it. The consultation states that the Standard will include very high fabric standards (including triple glazing and standards for walls, floors and roofs that significantly limit heat loss).
• The government will launch a consultation in winter 2019 to address the future trajectory for minimum energy efficiency standards for domestic buildings in the Private Rented Sector.
• The government will consult in 2020 on introducing mandatory in-use energy performance ratings for non-domestic buildings in the private sector. This suggests there will be minimum EPC standards even where a property is not let.

Comment

It is apparent that greater action is required to combat climate change. These are potentially significant measures. They signal part of much wider action that will be required to reach net-zero carbon emissions by 2050.