Agenda Minimum Energy Efficiency Standards (MEES): Explained - PowerPoint PPT Presentation

Agenda • Minimum Energy Efficiency Standards (MEES): Explained • Energy Performance Certificates • Case studies (x2) • Strategic Implications • What to expect? • What to do? 2 Confidential – Colliers International 2016

Minimum Energy Efficiency Standards (MEES) Context • UK Climate Change Act 2008: Legally binding targets: 34% carbon reduction by 2020, 80% reduction by 2050 • MEES arises from the subsequent Energy Act 2011, and are the method by which the requirements of the Act are being implemented in England & Wales • S63 Regulations in Scotland – Detailed energy reports on sale & new letting from 1 September 2016 Aims of the MEES Regulations (aka EPC F&G 2018) • To improve the energy efficiency of the very least energy efficient residential & commercial private rented properties i.e. those rated F or G on their EPC • To achieve the UK’s legislative targets, CO 2 emissions from all buildings must be ‘close to zero’ by 2050 • Helps tackle the traditional barrier to energy efficiency works – the ‘split - incentive’ – where the landlord foots the bill for improvements that benefit the tenant 3 Confidential – Colliers International 2016

Scope of the MEES Regulations • All residential & commercial private rented properties in England and Wales that are covered by the EPC regulations • Where an EPC has not been obtained, there will be no obligation to obtain one except where transactional triggers require them (i.e. sale and new letting, but not lease renewal) • Properties with an EPC rating of F or G will be prohibited from new lettings and also lease renewals from 1 April 2018 • All leases on properties with an EPC rating of F or G will be captured by the MEES regulations from 1 April 2020 (residential) and 1 April 2023 (commercial); i.e. upgrading by these dates to a minimum E standard will be required to continue to let the property without risking triggering non-compliance penalties • Tenants will need to meet their obligations under the MEES regulations as a landlord for the space that they sub-let • Trading Standards Officers (TSOs) will be the enforcement agents 4 Confidential – Colliers International 2016

Exemptions to MEES • Properties not currently covered by EPC regulations (e.g. Places of Worship, temporary buildings, Listed Buildings*, land, and ‘unconditioned’ buildings in England & Wales) • Where no potential measures meet a 7 year payback period – i.e. where the value of the savings from installation meet or exceed the cost of installation over a 7-year period, as confirmed by a Building Regulations compliant calculation undertaken by a suitably qualified professional*. • Where all 7 year payback compliant measures are implemented and the property still hasn’t achieved an E rating • Where the landlord has been refused consent by a tenant, superior landlord or another third party (e.g. a Statutory Authority) for measures to be installed (landlords required to use ‘all reasonable endeavours’ to secure consent) • Short term leases of less than 6 months* and leases longer than 99 years • Where installation of measures are considered to reduce the capital or rental value of the property by 5% or more • Exemption lasts for a total of 5 years before either meeting E rating or demonstrating exemption again • Exemption relating to tenant consent becomes void if the tenant leaves within the 5 year period *Further clarification required (expected to be covered in MEES guidance) 5 Confidential – Colliers International 2016

Here to stay? 6 Confidential – Colliers International 2014

Energy Performance Certificates (EPCs) • Grades the hypothetical energy efficiency of a property on a scale from A to G • Compares the building to a stock average and new built rating for that building type • Covers all types of buildings from offices, industrial units and other large commercial buildings as well as residential • Combined with a Recommendation Report on how the property's energy efficiency can be improved • Valid for a 10 year period • Lodged in a central Government register maintained by Landmark Information Services • Currently required for all sales and new lettings on applicable buildings 7 Confidential – Colliers International 2016

The SBEM Software Inputs SBEM Calculation Engine • Building Type (office, retail, etc) • 22 Categories • Building Fabric Types • Walls (external and internal) Windows • Floor • Ceilings/roofing • • No data  default settings • Building Geometry • Space sizes Since 2008 Space activity • orientation • • Approximately 14 versions • Building Services • 2 changes to Building Regulations Heating/Cooling • (2010 & 2013) • HWS • 5 versions of surveyor conventions Renewable Energy systems • (solar, PV, etc.) Ventilation (supply/extract) • Lighting • 8

Use of Defaults 9

Impact of Building Regulations • EPCs are linked to Building Regulations (Part L2A); • The EPC changes with Part L (23.5% between 2006 and 2010) and an increase of an average of 11% in 2013/14; • There are 25 Asset Rating points to each EPC band. Based on our predictions there could be a change of up to two EPC bands by 2018. 10

CASE STUDY – Shell and core • Client policy to strip out old lighting and heating • EPC Rating – G197 • Possible Upgrade › T5 Fluorescent Lighting › Air Sourced Heat Pump • EPC Rating – C60 11

CASE STUDY – Retail (high street) Current EPC E 121 (Draft) Potential Option Services Current System New Options New EPC Rating 1 Lighting Halogen LED D 90 2 Lighting Halogen T5 Fluorescent Lamp (T5) D 87 3 Lighting Halogen T8 Fluorescent Lamp (T8) D 88 4 Lighting Compact Fluorescent Lamp (CFL) LED E 112 5 Lighting Compact Fluorescent Lamp (CFL) T5 Fluorescent Lamp (T5) E 101 6 Lighting Compact Fluorescent Lamp (CFL) None N/A 7 Lighting T8 Fluorescent Lamp (T8) LED E 121 8 Lighting T8 Fluorescent Lamp (T8) T5 Fluorescent Lamp (T5) E 121 9 Lighting T8 Fluorescent Lamp (T8) None N/A 10 Heating AC Split System None N/A 11 Hot Water Instantaneous Hot Water None N/A Optimum Recommendation Halogen, CFL and T8 + AC Split System + T5 lamps (replaces all existing fittings) + 2 + 5 + 8 + 10 + 11 Lighting C 67 Instant HW AC (existing) + Instant HW (existing) Halogen, CFL and T8 + AC Split System + LED lamps (replaces all existing fittings) 1 + 4 + 7 + 10 + 11 Lighting D 81 Instant HW + AC (existing) + Instant HW (existing) T5 (replaces existing halogens), CFL Halogen, CFL and T8 + AC Split System + 2 + 6 + 9 + 10 + 11 Lighting (existing) and T8 (existing) lamps + AC D 87 Instant HW (existing) + Instant HW (existing) T8 (replaces existing halogens), CFL Halogen, CFL and T8 + AC Split System + 3 + 6 + 9 + 10 + 11 Lighting (existing) and T8 (existing) lamps + AC D 88 Instant HW (existing) + Instant HW (existing) LED (replaces existing halogens), CFL Halogen, CFL and T8 + AC Split System + 1 + 6 + 9 + 10 + 11 Lighting (existing) and T8 (existing) lamps + AC D 90 Instant HW (existing) + Instant HW (existing) 12

MEES: Strategic Implications • Impact on market is slowly becoming clear but currently no legal precedence • Legislative requirement for landlords to comply • Marketability of F & G rated properties will be affected • Valuation of such properties will be affected if marketability diminished • Occupiers can potentially argue that rental value of F & G rated properties should be discounted • Implications for dilapidation assessments may also emerge (e.g. around reinstatement provisions) • Potential restrictions to tenant’s alterations/fit-out – energy efficiency of proposals likely to be reviewed • Potential for reputational damage as the names of landlords in breach of regulations will be published on the PRS Exemptions Register 13 Confidential – Colliers International 2016

MEES: What to expect? • Landlords seeking to pass responsibility to tenants where possible: • Tenants to carry out works identified in the EPC recommendation report relating to the premises • Tenants to pay for the cost of improvement works to the interior of the premises • Tenants may be prohibited from commissioning an EPC, even where one may already exist for the premises • New Leases and Licenses for Alterations may require tenants to act and fit out in an energy efficient manner – Major investment house: “Tenants fit out should not detrimentally affect the current EPC rating” • A right for the landlord to enter the premises to carry out energy efficiency improvement works, if the tenant in its absolute discretion consents to the landlord carrying out the works • Lease terms not to exceed 1 April 2023 or rolling breaks potentially introduced (effective 1 April 2023) – conditional upon the property requiring investment in order to satisfy MEES • Check the following clauses carefully in leases: • Landlord’s costs clause • EPC clause; and • • Service charge provisions and costs Repair obligation • Beware of short and simple tenant covenants hidden away in clauses relating to EPCs, e.g. “The Tenant shall carry out the recommendations contained in any EPC relating to the Premises” 14 Confidential – Colliers International 2016