What MEES means to YOOU

Recently featured in the Business MoneyFacts Magazine (September 2024 issue), I’m pleased to publish my latest article plus additional insights on how the MEES 2027/28 regulations will impact the office landscape, and what that means to commercial landlords, property owners and tenants.

You might not know it, but you have already been impacted by the Minimum Energy Efficiency Standards (MEES).?

These regulations have been in force since 2018, with commercial buildings required to have a minimum Energy Performance Certificate (EPC) rating of E or higher before they can be rented to new tenants or renewals. In April 2023, this was upgraded to include existing tenancies as well, making it against the law to have a tenant in any property with a lower rating.

The next update to the minimums will be on 1st?April 2028 whereby all buildings must be rated C or higher, and by 1st?April 2030 all buildings must have a minimum of B.

This article explores the impact of these regulations on landlords and tenants, as well as the possible opportunities this presents.

What is the big deal about EPC ratings anyway?

The Energy Performance Certificate (EPC) is a measure of how energy efficient your building is, with A being the highest and G the lowest. ?

Buzzwords around energy efficiency and sustainability are all over the place these days, some more legitimate than others, and you could be forgiven for rolling your eyes at the latest hype over the commercial EPC requirements.

So why should you pay more attention to this regulation in particular?

In a word: money.

A more energy efficient building, whether if it’s an office, home or otherwise, will drastically reduce energy bills. Higher EPC-rated buildings reduce the amount of heat lost due to poor insulation of the floors, roof, windows and walls, use less energy to light the rooms by choosing LED bulbs, and/or use a more efficient boiler/heating/air-con system. Depending on the tenancy agreement, this can impact the landlord or the tenant’s monthly costs.

If shaving off a few quid from the monthly bills doesn’t seem enough of an incentive, how about this: demand for energy efficient and environmentally friendly buildings is skyrocketing (and at the moment there is very low availability of high-quality, energy-efficient buildings), which in turn results in an uplift of property value several times over the cost of the works needed to improve the EPC rating. What’s more, as a landlord you can command higher rental values as well as reducing your operating costs as a direct result of the improvement works.

As a tenant, whilst you might not see as much of a cost benefit except on reduced utility bills if you’re responsible for covering those, you reap the rewards in the form of higher quality offices and amenities as developers compete to deliver high-standard buildings, incentivising your post-pandemic colleagues to leave the comfort of their own home. Not to mention, you can personally contribute to a positive environmental impact and carbon emission reductions by just going to work.

What if my building hasn’t been upgraded by the deadline?

The next update to the deadline will see all properties requiring an EPC rating of C or higher. If a building is not compliant by 1st?April 2028 but has ongoing leases, the landlord could face significant legal and financial complications. This includes tenants who have in-turn sublet their space.

Whilst there are exemptions to this deadline, the majority of properties could face fines of up to 20% of the rateable value of the property (up to a maximum of ￡150,000) depending on the amount of time in breach.

A recent check of the Energy Performance of Buildings Data on the Department for Levelling Up, Housing & Communities portal shows that only 46% of non-domestic buildings currently have an EPC rating of C or higher, and only 16% are B or higher (as at 30th?June 2024). Over 10% are already in breach of the minimum standards - many of those are already for sale.

Whilst you may look at that percentage as a daunting figure, it’s actually a huge opportunity for anyone willing to put in the time and effort. Cities across the UK face the prospect of an upgraded skyline both in aesthetics and in energy performance, and any savvy developer can acquire poorly-rated buildings for a discount and benefit from the financial uplift of going green.

Can I get finance to upgrade my building if I can’t cover the costs myself?

Current estimations of the cost to upgrade the EPC rating vary anything from ￡10 to ￡70 per square meter, depending on the level of works carried out and what rating you wish to hit. As an office owner, that additional cost could be seen as prohibitive if you also lose the income from tenants during your upgrades.

However, there are creative ways around this which can benefit all parties involved:

A recent client of Arc & Co. needed finance to purchase and renovate their office building to an EPC rating of A which had existing income-generating tenants as well as empty floors. We helped the client secure a loan of ￡19.52m over a period 3 years to cover additional roof space, terraces for the upper floors and a new facade, prioritising the refurbishment of the empty floors which were then rented out at an improved rate. The existing tenants were able to either move to the new office or finish their existing term, with their vacated space refurbished to the same standard. The whole building will be completed by 2026, bringing more high quality, environmentally friendly office space to the city.

In addition, many of the lenders we work with are incentivising such improvement works by offering rebates. This brings down the cost of funding, directly impacting the profit on cost during the works.

Will there by any further extensions to the current deadlines?

MEES was put in place to help existing, older buildings to help the UK Governments meet its 2030 goal in reducing in carbon emissions (new-builds are already covered by building regulations to meet the minimums).

The original deadline of 2027 was pushed back in 2023 by a further year to allow landlords more time to make the necessary EPC upgrades to a minimum level of C, but the 2030 deadline to reach B or higher is still in place. Given the current urgency surrounding climate change and the UK’s commitment to net-zero emissions by 2050, it is becoming increasingly likely that the 2028 deadline will be enforced without further extensions, especially given the recent change in government to Labour and their pledges to improving environmental policies.

Conclusion

The EPC upgrades are coming into force one way or another. Although the deadlines pose challenges, they also offer significant opportunities for forward-thinking owners and investors to enhance the value and appeal of their properties. The commercial real estate sector’s commitment to sustainability will not only benefit the environment but also drive long-term value and resilience in an evolving regulatory landscape.

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