Net Zero, what does it mean for the commercial property sector?

In June 2019, the UK government became the first major economy to legislate for net zero greenhouse gas emissions. The legislation requires the UK to bring all greenhouse gas emissions to net zero by 2050. In addition, the UK has interim Carbon Budgets, which require a 57% reduction in emissions from across the UK economy by 2032, as well as ambitions to reduce business energy use by 20% by 2030 under our Clean Growth Strategy.

What will this mean for the commercial property sector?  Given the fact that building stock accounts for 31% of our national emissions, the simple answer is that this means change and quite quickly.

To achieve this change in the commercial sector the Government are looking at two key areas:

• Firstly, overhauling the minimum energy efficiency standards for commercial buildings; and
• Secondly, introducing a system where larger commercial buildings have to publish details of their energy performance.

Minimum Energy Efficiency Standards for commercial buildings

The Energy Efficiency (Private Rented Property) (England and Wales) Regulations set a minimum energy efficiency standard (MEES) for private rented properties. This is measured using the building’s Energy Performance Certificate (EPC), with A being reserved for the highest performing buildings and G for the lowest.  Currently under the Regulations, properties let on new tenancies (including renewals) since 1 April 2018 must have an EPC E or above. From 1 April 2023 all privately rented properties must meet this requirement (even where there has been no change in tenancy).

In a consultation published in 2019 the Government sought feedback on whether to increase the EPC target for commercial buildings from EPC E to either C or B by 2030. The Government settled on increasing the level to EPC B and then issued a further

Consultation in 2021 seeking feedback on the steps being proposed to achieve this.

How is this being implemented?

• Interim milestones and two-year “compliance windows”: The plan is to phase in the requirement for EPC B by using an interim milestone of EPC C in 2027 to ensure early action is taken, rather than building owners waiting until the 2030 deadline to act. To facilitate this, two compliance windows will be introduced and each will begin with the requirement for landlords to present their current EPC to a new online PRS and compliance database.
• First compliance window for EPC 2025-2027; landlords must submit their current EPC to the new online database by 1 April 2025. If the building does not have an EPC C or above, the landlord must undertake works and by 1 April 2027 submit a new EPC to demonstrate the building now has an EPC of at least C or has achieved the highest EPC possible if it is lower than C, and register an exemption.
• Second compliance window for EPC B 2028-2030; landlords must submit their current EPC to a new online database by 1 April 2028. If the building does not have an EPC B or above, the landlord must undertake works and by 1 April 2030 submit a new EPC to demonstrate the building now has an EPC of at least B or has achieved the highest EPC possible if it is lower than B, and register an exemption.
• The interim milestone should not be taken to mean that landlords must improve their properties to an EPC C before then improving the property to achieve an EPC B. The Government is clear that landlords should invest in the improvement of their buildings in a way that is most cost-effective and minimises disruption to themselves and their tenants. In some cases, a landlord’s best approach might be to invest in the building to bring it up to an EPC C and then an EPC B. However, it may be better to undertake one significant retrofit which brings the property up to EPC B.
• Exemption validity period: Normally any exemptions registered are valid for a period of 5 years (except temporary exemptions which usually last only 6 months), but for the purpose of increasing the minimum EPC rating to B, all properties will be required to review their existing exemptions at the start of each of the compliance windows as detailed above.
• Continuous requirement to have a valid EPC: Going forwards, there will be a continual requirement to have an EPC if letting. Currently, once an EPC expires after ten years, a new, valid EPC is only required when the property is re-let (arguably, not when a tenancy is renewed or extended with the same tenant in situ).
• Introducing requirements for post-improvement EPCs: By mandating post-improvement EPCs after works have been undertaken to a building, the EPC rating of a building will be kept up to date after any changes to the property that affect energy efficiency have been made. This make it easier for local authorities to check and enforce compliance.
• Payback test: Currently improvements to energy efficiency are only considered relevant improvements that must be undertaken if it can be shown that the cost of the work will be covered by energy savings over a period of no more than seven years. To determine if improvements are relevant works, three quotes have to be obtained and, if the works are too costly to be carried out, submitted when registering a MEES exemption. A more efficient and user-friendly ‘payback calculator’ is being proposed to replace the “three quotes” system. The calculator will provide standardised purchase and installation costs of energy efficiency measures, based on actual industry data. Landlords will be able to input their building characteristics from which they would then receive a list of measures that are in scope or out of scope of relevant improvements for their building based on pre-populated cost and payback assumptions.

It is also proposed to mandate that a package of energy efficiency measures should be installed, where they are cost effective. Certain measures which might individually fail the seven-year payback test, may pass when installed together with other measures as a package. A standardised calculator would be able to quickly select an appropriate package of measures within the payback period. Landlords will be able to understand, in a straightforward manner, what is expected of them under the regulations and will be able to clearly demonstrate compliance.

What about enforcement?

• New exemptions and compliance database: Rather than the current database that is just used to register MEES exemptions there will be a new database where all EPCs will need to be registered; remember that the compliance windows in 2025 and 2027 will require all current EPCs to be registered and thereafter there will be a continual obligation to have a current EPC registered. It is proposed that data from this database will be made available to local authorities to help them identify properties where enforcement action is required.
• Letting agents and online platforms must have an EPC before marketing: Currently letting agents have an exemption of up to twenty-one-days which can enable them to market a property before an EPC has been obtained. It is proposed this exemption should be removed.
• Inspection of properties: Local authorities will be able to carry out an inspection at an agreed time with landlords and any tenants.

What are some other key changes?

• Listed buildings: It is proposed that listed buildings will need an EPC. The Government has however committed to review EPC recommendations for listed buildings to make them more suitable to older properties by the end of 2021 as part the EPC Action Plan published in September 2020.
• Shell and core buildings: Problems have arisen when existing MEES Regulations are applied to premises rented in a shell and core state, since until the tenant’s fit out works are completed, the EPC of the building is often below the EPC E rating required to enable it to be lawfully let. To solve this problem, the Government proposes that a tenant must have occupied a property for a minimum of six months before a local authority can take action against the landlord for failing to meet MEES. There is also a proposal for a new type of temporary 6 month exemption for a landlord to register to demonstrate that their property has been let in a shell and core condition. Once the temporary exemption expires, local authorities would be alerted via the PRS exemptions and compliance database. At this point, the property would be required to have met the relevant EPC standard or to have registered another relevant exemption.
• Obligations to be placed on tenants: The Government is considering giving tenants of non-domestic properties some duties regarding compliance with MEES rules, and to add consequent duties of cooperation for both landlord and tenant that they must work together to reach compliance.

New consultation on monitoring energy performance

Alongside the publication of the MEES consultation the Government also published a Consultation on energy and carbon performance in the commercial sector. Commercial and industrial buildings above 1,000m² account for only 7% of all non-domestic buildings, but use over half of the total energy used, and carbon emitted, by all non-domestic buildings. Consequently, the Government believes it is crucial to look not only at the energy efficiency of buildings themselves but also how efficiently the occupants consume energy; a high EPC score is no guarantee that a building will use less energy and emit less carbon as a result.

Under the proposals outlined in this consultation, building owners and single tenants will be required to obtain a performance-based rating annually, and to publicly disclose that rating online. A soft launch was proposed for April 2022 with registration being voluntary but this date has clearly slipped since as at March 2023 the Government has not yet issued its report on the outcome of the consultation. Mandatory disclosure would be required in subsequent years.

If it is introduced, the Government plans to introduce the rating in three phases over the 2020s. Alongside this consultation the Government has published a shorter and more targeted consultation on how the framework could be implemented in the office sector, which will be phase one. Phase two and phase three of the rating’s introduction will address the remaining sectors
The proposals in this consultation go beyond just introducing a new metric. To meet the UK’s climate targets, these ratings must improve over time. This will require clear incentives, and potentially regulation in the future.

What does this mean for the commercial sector?

Whilst the delays in implementing the changes proposed in the 2021 Consultations highlighted above might encourage some landlords to take their eye off the ball, we believe that the pace of change is inevitably quickening and landlords should not ignore the proposed changes, even if their implementation has been delayed. On 7 February 2023, the Government created a new Department for Energy Security & Net Zero and one of its six stated priorities is to “Improve the energy efficiency of UK homes, businesses and public sector buildings to meet the 15% [energy] demand reduction ambition”. The Government is committed to meeting its Net Zero targets and these can’t be achieved without significantly improving the energy efficiency of buildings. Landlords should appreciate that whilst the existing MEES regime only affects about 10% of the non-domestic rented stock (as most building have EPCs of E or above), the new proposals requiring a minimum EPC of B will pull around 85% of non-domestic rented stock in the category where improvements and/or exemptions will be required.

If they have not already done so, landlords should start to look at their portfolios now, they need systems in place to monitor their portfolios to identify properties that may need to registered for the new energy performance rating, and those that will fall below the EPC B rating for MEES, so that they can plan how to carry out the improvement works that will be required in the most cost effective way.

If you have any questions about this topic, please get in touch info@ts-p.co.uk