Could an Energy Performance Contract be the answer to those with MEES Concerns?Posted 26 April 2017
It is now just under one year until the new Minimum Energy Efficiency Standards (MEES) regime comes into force. From 1 April 2018, it will be unlawful for Landlords to agree a new tenancy or a renewal for a property rated F or G on its energy performance certificate (EPC), unless certain exemptions apply. Landlords must upgrade the energy efficiency of these properties to at least a band ‘E’ before the property can be leased.
From 1 April 2023 the Regulations will also start to apply to all existing lettings and not just to new lettings. In other words if you do nothing about improving the energy efficiency of a non-compliant property, it will be a breach of the Regulations to allow existing leases to continue where the rating is F or G subject to some-time limited exemptions that impose a high burden of compliance.
Penalties for commercial properties will be based on the rateable value of the property. Where a landlord has been in breach for less than three months, fines will not exceed 10% of the rateable value subject to a cap of £50,000. The level of fine will increase for breaches that exceed three months to 20% of the rateable value subject to a maximum cap of £150,000.
The cost of improving the energy performance of the property to comply with the legislation will generally rest with the Landlord, particularly in relation to existing leases. This is because, in the main, the cost of improvements falls outside most service charge regimes and are unlikely to fall within a fairly standard tenant’s obligation to comply with statute.
An Energy Performance Contract means the Landlord can transfer the risk of improving the energy efficiency of his property to those who are specialists in this field and are able to ‘guarantee’ the results. In most cases this will ensure an improvement way beyond a band ‘E’ which will not only future proof the property it will increase its market attractiveness and most likely its yield.
The ‘guarantees’ provided in the Energy Performance Contract will include the Landlord being paid back any shortfall if the energy savings level set within the contract are not met.
Finance can also be included within the energy performance contract and in most cases the payments will be less than the energy being saved meaning the Landlord can ensure the property or properties are fully compliant with Zero capital outlay and Zero risk. This would like the illustration below;
Energy Performance Contracts have been used successfully in the UK Public Sector for some time now where Energy Service Companies (ESCo’s) such as Asset+ are engaged to improve the energy efficiency of a facility where the guaranteed energy savings pay for the capital investment required to implement the improvements.
The ESCo examines a facility, evaluates the level of energy savings that could be achieved, and then offers to implement the project and guarantee those savings over an agreed term. This will generally include a mix of both demand side and supply side energy conservation measures that are focused on reducing energy consumption and carbon emissions with the best possible commercial benefit. These are generally measured in terms of kWh’s saved or the NPV over the contract term so measurement in terms of an EPC rating would be new but ultimately the point of the legislation is the same i.e. to reduce energy consumption.
Paul Burnett, Managing Director of Asset+ advises: ‘Landlords need to act now to avoid being slapped with a hefty fine. The first step is to ensure properties have a valid EPC that takes account of any changes and improvements made to a building. Once poor performing buildings are identified, the Landlord needs to decide if they just want to comply with Legislation and improve from an ‘F’ or ‘G’ to an ‘E’ or improve beyond this and look to both future proof and improve the marketability of their property. An Energy Performance Contract is a sensible choice as the Landlord can ensure the property or properties are fully compliant with Zero capital outlay and Zero risk.’
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