The ultimate goal for achieving minimum energy performance standards is a ‘factor five’ improvement, while maintaining current growth projections

Julie Hirigoyen

Maybe you don’t automatically think of magic tricks when you read Government Consultation papers, especially one entitled “Private Rented Sector Minimum Energy Efficiency Standard Regulations (Non Domestic) (England & Wales)”. Yet magic it is when you finally unpick the small print on how to achieve minimum energy performance standards, or MEPS, as they’re often known.

Any good magic trick has a number of key components - so I have framed this article around these:

1. The effect – name used to refer to the trick itself
In this case, the overarching goal of MEPS and ultimate standard required

2. The backdrop – scenic frame behind the magician
In this case, more of a backstop date for a phased introduction

3. The first magician’s ‘out’ - what he does when the trick goes wrong
In this case, the ‘reasonable payback’ exemption

4. The second and third magician’s ‘out’
In this case, the consent and devaluation exemptions

5. The finale - or sometimes called the ‘reveal’
In this case, the cap on exemptions

The effect

This particular effect is pretty tough to achieve. The ultimate goal is a ‘factor five’ improvement in our national carbon efficiency, while maintaining current growth projections for the same period. That’s emitting five times less carbon than we’re used to, when over half of the commercial buildings in use today will still exist in 2050. With non-domestic buildings responsible for over 12% of our national carbon emissions, it doesn’t take a magician to figure out the scale of this challenge! We will need to bring all our E-rated Energy Performance Certificates (EPCs) up to an A - a five band jump in the scale of efficiency. Yet the proposals in today’s consultation only address F and G rated buildings - and even this is proving tough for our audience to figure out.

The government is proposing that landlords would need to periodically evidence that the exemptions still apply or else meet the minimum E rating at a later date

The backdrop

There is no five in 2018 - the date by which all new leases, at least, will need to comply with an E-rated EPC. Yet to achieve the full effect, the regulations will need to capture many more leases more quickly. So a five-year backstop is being mooted as a sensible alternative to a hard start for all leases in 2015. This means we must keep our eye on 2023 rather than 2018, and the five years in between will no doubt paint the landscape of the regulatory impact. As these years unfold, the ‘compliance buffer’ mitigating the impact of MEPS on commercial landlords is meant to disappear like an illusion - supposedly leaving nothing but A to E rated buildings in its wake. Because as the consultation reminds us, five years is around the time taken for an average commercial property lease to expire. (Except of course if you happen to have several old-fashioned institutional leases - typically 25 years long, full repairing and insuring, with five year upward only rent reviews. In this case your predicament is not entirely clear.)

The first magician’s ‘out’

There’s often a comedy amidst the drama of a magic trick, and this one is no exception. Despite the Green Deal Finance Company not currently offering Green Deal finance on non-domestic properties, the proposed regulations suggest that MEPS compliance should be underpinned by a Green Deal Assessment. The landlord will need to implement all the improvement measures identified by the assessment that meet the ‘Golden Rule’. Under this rule, the cost of the improvements must be the same or less than the expected energy bill savings. At this point at least the landlord is given an ‘out’. If all the improvement measures that meet the Golden Rule have been implemented, but the property still cannot achieve an E rating, the property is exempt. And current proposals suggest landlords may even have another option at their disposal: the same exemption may be available if they can demonstrate that they have undertaken all those measures that have a ‘reasonable payback period’. Of course the audience will be interested in the trick behind the ‘reasonableness test’ - will this be short (under 3 years), medium (3-7 years), or long (over 7 years)? Or perhaps the magic number five will be applied to this test too just to make things easy.

The second and third magician’s ‘out’

In addition to the ‘reasonable payback’ exemption, landlords have a second exemption opportunity if they are able to supply evidence of a relevant third party withholding their consent to the works being done. Given that tenants, planning officers and others are likely to have strong views about changes to these buildings, this particular exemption seems sensible. Although once again, a savvy audience will be keen to understand what might constitute ‘reasonableness’ in the withholding of consent. It might be helpful for the regulations to introduce a presumption in favour of consent. But more intriguingly perhaps, the government appears to also be considering the possibility of yet another exemption - the magician’s third ‘out’. Should the package of measures implemented to improve the EPC rating of the asset have the unfortunate consequence of adversely affecting its value, the property may be exempt. The Consultation refers explicitly to a ‘net material decrease in the property’s capital or rental value’ - and once again our magic number five is mooted as a sufficiently material percentage decrease to allow for such an exemption. In reality of course, since property valuation is far from being an exact science, such a precise 5% impact on value is unlikely to be easily attributed specifically to HVAC improvements or extra insulation, so one cannot help wondering whether this particular proposal is workable or not.

The finale

The twist to this trick lies in the finale: despite the magician being offered plenty of ‘outs’ should the trick go wrong, none of these exemptions will last in perpetuity. Mindful of the fact that improvement works may come down in price, payback periods may be determined by the cyclical nature of the market, and new technologies may come to market, the government is proposing that landlords would need to periodically evidence that the exemptions still apply or else meet the minimum E rating at a later date. And what might be the appropriate time frame for exemptions to expire? You guessed it: five years, yet again, is considered a ‘reasonable’ time period for exemptions to expire.

Who would have thought? I suppose by laying the regulations by the start of 2015, the government is also mindful of the national election scheduled for month five in the same year.