The Covid-19 outbreak has had a hugely negative effect on the physical retail sector. Now that stores have started to reopen we are looking back at the more traditional risks that must be identified and managed for our clients.
The Minimum Energy Efficiency Standard (MEES) came into effect in England and Wales in April 2018. It’s one of a set of legal measures that fall under the Climate Change Act 2008 which in turn led to the Energy Efficiency (Private Rented Property) Regulations 2015. The background to this energy legislation is the Government’s overarching commitment to reach net-zero greenhouse gas emissions by 2050. MEES addresses the energy efficiency of our buildings which will have such a large impact on the achievement of this challenging objective.
At its introduction, MEES sent shockwaves through the retail sector. The new regulations effectively prohibited letting or renewing leases on shop units with an F or G rated Energy Performance Certificate (EPC). These properties have the poorest energy performance, so they’re an obvious target for the Government. The hardest hit landlords were those owning shopping centres with a large number of units and a relatively high turnover of tenants. A retail unit with a MEES non-compliant EPC rating needs to have its energy efficiency improved before it can be let. This can often be as simple as changing the old hot spotlights on the shop floor to more efficient LEDs.
It gets more complicated when it comes to deciding whose responsibility these improvements are. Strictly speaking, the liability for complying with MEES falls on the landlord but it is often an inefficient tenant fitout that’s causing the poor EPC rating. Landlords are able to apply for a five-year exemption for various reasons, but this can be difficult to obtain and is made public, so comes with some reputational risk for building owners, especially those promoting their own environmental credentials. But that’s not where the story ends; in 2023, the regulations will extend to cover all current leases. That will really poke the hornet’s nest. Data shows that 15% of all EPCs lodged since 2008 have had an F or G rating.
The prudent strategy is to address the problem now rather than delay it. So, as experts in energy performance what advice are we giving our shopping centre and retail investment owners? Implement a systematic review to identify the risk, then develop a strategy to make the necessary improvements, and finally carry out a further, more detailed analysis of the units identified as a problem.
Many of our clients are already looking at the impact of MEES compliance on their portfolios and are asking us to help them get ahead of the deadline. One of our large investor clients, has been proactive in getting on top of EPC and MEES management. Building Consultancy’s Environmental Consultancy team has been working closely with our Property Management colleagues to devise a strategy to make the necessary assessments, analyse the risk, prioritise units that need attention, and implement the work needed to achieve compliance. This is a current project and so far we have assessed 120 of the 200 units in the development. We found many that didn’t satisfy MEES, so we have provided our investor client, and the property managers, with recommendations for simple and cost-effective improvements to achieve compliance.
EPC assessments like this must be done with tenants in occupation. If shop units are empty and returned to shell and core condition, the EPC rating will always be non-compliant. Otherwise compliance needs to be addressed through an agreement for lease to avoid the risk of installing lighting and other systems that a new tenant will immediately remove. So, for all landlords, tenant engagement is really important. Making sure tenants install a good quality, energy efficient fitout is key. In parallel, keeping on top of lease and EPC expiries is a vital management discipline.
Perhaps most importantly of all is achieving much better energy efficiency in our buildings. A net-zero society would be an incredible achievement, and this is one step in getting there.