Written by Caitlin Southall, Pension Technical Manager, Curtis Banks
The Government has set a very ambitious target of 2050 to become net zero. It’s a world-leading target, and the Government has outlined their intentions in terms of delivering against this optimistic aim in the UK Energy White Paper 2020.
As part of this process, there has been a focus on the energy performance of commercial properties in England and Wales for a number of years. The Minimum Energy Efficiency Standards (MEES) regulations were initially introduced in April 2018, and at that stage there was a minimum Energy Performance Certificate (EPC) rating of E in order to put a new lease in place. Any existing lettings for non-compliant properties were at this point, unaffected.
The regulations became more stringent earlier this year. From April 2023, commercial properties had to have a minimum EPC rating of E in order to continue an existing letting. So in principle, any existing leases for those non-compliant properties would need to come to an end until such time as the EPC rating was E or an exemption from the MEES regulations was successfully obtained.
It’s critical that providers have a robust process through which they can identify those properties that are non-compliant with regulations, and with EPCs expiring in the short term. EPC ratings are based on building regulations, which change over time. There is a risk that SIPP or SSAS properties that currently have an EPC rating of an E, and are therefore compliant, might fall into an F or G rating when the EPC is updated. If this happens, works will be required to improve the energy efficiency in order to continue to be let, or sold.
The intention was that by 2027, properties would require a minimum C EPC rating in order to be let or sold. This requirement was set to increase to a B rating by 2030. However, there is a new Bill currently nearing it’s second reading in the House of Lords called Minimum Energy Performance of Buildings Bill that, if passed, will amend these milestones. The second reading of this Bill is due on 24th November 2023.
If passed, this Bill will change the roadmap for energy efficiency for commercial property. The Bill removes the 2027 milestone, requiring a minimum C rating. The requirement for a B rating by 2030 will remain however. This Bill also adds additional requirements for both residential and commercial properties for the industry and clients. For example, placing obligations on all mortgage lenders to ensure that the average energy performance of their domestic properties is at least a minimum C EPC rating by the end of 2030. Whilst this does refer to the residential market, it wouldn’t be unreasonable to assume that a similar requirement may be introduced for the commercial market too. This therefore has the potential to limit the lending market for those commercial properties who hold an EPC rating lower than C.
Bearing in mind that around 1 in 5 commercial properties in the UK are rated F or G, it’s safe to assume that more properties will fall within the exemptions currently available under existing MEES regulations. An example of an existing exemption is the ‘7 year rule’, where the cost of works to improve the energy efficiency of a building to a minimum E standard would be more than the cost benefit of the works over a 7 year payback test.
The Bill states that in the event that the work required to bring a non-domestic property up to a minimum B standard by 2030 is not ‘cost effective’ then an exemption may apply. However, ‘cost effective’ is not defined by the Bill and the ‘7 year rule’ exemption already addresses the cost effectiveness of energy improvement works within the existing regulations. Where this exemption will be amended or added to in the Bill, if passed through, will be interesting. We may see the existing emptions expanded on or revised as opposed to a list of new exemptions.
For pension clients, the proposed energy improvement roadmap should be considered when they review their portfolio and investment strategy. Clearly there is a large amount of unknown in respect of the evolution of the MEES regulations- especially with a general election on the horizon.
Clients should ensure that any existing or potential property acquisition through their SIPP complies with the MEES regulations to avoid any future enforcement action, the risk of a limited resale market, or the inability to let the property once in the pension to realise an investment income.
Commercial property investment can be a profitable and worthwhile exercise via a pension, however this potential is underpinned by compliance with both pension and property regulations, of which MEES forms a key part. And from the Government’s actions, it seems like MEES will be a consideration for many years to come.
