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Research finds increased risk to commercial properties from MEES regulations

New research has suggested that a higher proportion of commercial properties than previously thought will fall under the new Minimum Energy Efficiency Standards (MEES) regulations due to updated building regulations affecting EPC ratings.

Arbnco, currently transitioning from CO2 Estates, found that almost a quarter (24%) of the 3,500 properties on its SBEM consultation platform achieved lower ratings than previously awarded upon re-simulation.

In addition, a third of commercial real estate with EPCs rated D and E dropped into the ‘at risk’ categories of F and G.

From 1 April 2018, commercial properties will not be able to sign new tenancy agreements unless they reach a minimum EPC rating of E. It has been estimated these rules will affect a fifth of non-domestic buildings however Arbnco’s findings suggestion this could be considerably higher.

According to Ruth Gilbody, head of business development at Arbnco, the change in ratings has been caused by tightening building regulations that in turn increase the requirements of each EPC band.

“As the building regulations tighten the software then gets upgraded and it changes. A lot of those properties would have been fine in previous versions and when you run them in the up to date current version that's where you get the changes,” she said.  

Arbnco's software provides the ability to quickly assess the EPC rating improvements required to ensure a property meets MEES regulatory compliance.

Arbnco's software provides the ability to quickly assess the EPC rating improvements required to ensure a property meets MEES regulatory compliance.

The properties on Arbnco’s platform had all carried out EPC ratings within the last five years. Currently, an EPC rating lasts for ten years unless there is a ‘trigger event’ such as a new letting or sale.

MEES regulations are tied to this as new tenancies will not be possible unless the property reaches an E rating.

Simon West, co-founder of Arbnco, said: “With MEES just over a year away, landlords, property managers and their advisors need to be acting now to ensure buildings do not pose a risk.  The analysis was conducted on well-managed building stock, so there is potential to observe a greater percentage drop in EPC ratings in poorer performing portfolios.

“Not everyone involved in the management of a building has a background in engineering, but the impacts of poor energy performance and forthcoming MEES legislation will affect all, and informed decisions need to be made.” 

Gilbody added that while the UK’s largest commercial property managers have been preparing for the introduction of the new regulations since initial legislation was first put forward in 2011, smaller firms remain at risk from non-compliance penalties.

“There are [those] who I don't think are taking this that seriously or don't really understand it. I still think there's a number who don't really know what they need to do and a lot of them are just starting to think about getting their portfolio details together.

“What we're finding is a lot of them don't have EPCs where they should. Compliance with the original EPC regulations I think is still quite poor,” she explained.

Recently published guidance on the non-domestic MEES regulation outlined the consequences for not falling in line with the rules, including a maximum fine of £150,000 if a company is found to be in breach for three months or more.

Reputational damage can also be caused as enforcement authorities will be able to publish details of the landlord’s breach on the publicly accessible PRS Exemptions Register, which will be available for view by the public for at least 12 months.

Gilbody added: “I think [reputational concerns] would be quite high up, definitely for the big organisations because they're obviously trying to attract investors, who I think are getting quite wise to the fact that if it's well-managed and sustainable, you've got a potentially better tenant you can keep longer. So there is investor pressure but they also don't want to be seen to be not complying.”