We regularly act for lenders in respect of taking security over investment properties let to tenant occupiers. Since the introduction of the 2011 Energy Act there has been a slow but growing emphasis placed on the Government’s impending obligation to set minimum energy performance standards (MEPS) for commercially rented property.
In July, The Department for Energy and Climate Change published its consultation paper on the proposed Private Rented Sector Energy Efficiency Regulations (Non-Domestic). These Regulations must come into force by 1 April 2018 in accordance with a European Directive. The consultation paper sets out the MEPS for private non-domestically let properties and will therefore be of interest to any commercial Landlord.
How does this affect a landlord?
Landlords will be familiar with the requirement to provide an incoming tenant with an Energy Performance Certificate (EPC). EPCs provide an energy efficiency rating on a sliding scale between A and G with A being the most energy efficient).
However, from 1 April 2018 any premises towards the bottom of the EPC ratings may be caught by the implementation of the MEPS. This is because the Government’s proposed MEPS will require all properties let after the 1 April 2018 to meet a minimum energy efficiency rating. Current proposals are that this minimum will be efficiency rating E. Any property with an F or G rating will therefore not be lettable until such works have been carried out as are necessary to bring those premises within the MEPS. It is estimated that this may affect up to 18% of the total commercial rental stock in England and Wales. Further to this a retrospective back-stop date of 1 April 2023 is proposed by which date all rented premises must meet the MEPS (although this will be subject to a number of safeguards to protect landlords).
Why might this affect our ability to secure funding?
Given the impending introduction of MEPS we have increasingly noticed that lenders and their instructed valuers are paying more attention to EPCs: in particular, where they are taking security over commercial investment properties. Lenders are beginning to take the view that they will not lend against properties falling short of the proposed MEPS and we expect this will increasingly become the market norm as the deadline for the implementation of the Regulations approaches.
Now is the time to start thinking about upgrading any premises falling below the MEPS. Although there may be an initial outlay to improve the energy efficiency rating serious consideration should be given to the potential loss of rental income going forward if you are unable to let your premises after 1 April 2018.
The Government is keen to promote funding through schemes similar to the Green Deal which is currently available for domestic properties. The Green Deal is beyond the scope of this blog post but in essence the Government recognises that there is an inherent unjustness where landlords are expected to pay for improvements which will benefit tenants through lower energy costs, so the idea is that improvements will be provided with no upfront cost but with any costs recoverable through the Tenant’s future energy bills. Similar schemes for non-domestic properties may well become available as the implementation date for MEPS nears.
Now is the time to start taking positive steps towards upgrading rental properties. If you do not have EPCs for any of your properties then consider commissioning them to ensure that you are not left out in the cold come April 2018.
The consultation remains open until 2 September and the paper is available for consideration via https://www.gov.uk/government/consultations/private-rented-sector-energy-efficiency-regulations-non-domestic.