Impact on Investors: Raising the Minimum Energy Efficiency Standards (MEES) in the Private Rented Sector and the Reform of the Energy Performance of Buildings (EPB) Framework

Energy Performance Certificates (EPCs) are a key, albeit imperfect, measurement tool for assessing the energy performance of buildings. EPC ratings are used as the basis for energy efficiency targets, including for the minimum energy efficiency standards (MEES) for the private rented sector (PRS).

The government has published a consultation, which is open until 2 May 2025, seeking views on its proposal to raise the MEES in the PRS in England and Wales. This consultation is hot on the heels of a government consultation, which is open until 26 February 2025, on reforms to the Energy Performance of Buildings (EPB) framework including new metrics for EPCs and refining EPC requirements.

Raising the Minimum Energy Efficiency Standards in the Private Rented Sector

MEES currently requires PRS properties to be rated Band E or better on a valid EPC, unless there is a valid exemption. The previous government (in a 2020 consultation) consulted on raising this minimum EPC threshold to Band C. However, the current government’s preferred approach is to set higher MEES in the PRS against new EPC metrics (see 'Updating EPC metrics' below for details of the new metrics).

The government's preferred approach is to require landlords to meet:

1. a primary standard set against the fabric performance metric (which the government states is likely to require similar improvement measures as meeting an EPC C on current EPCs); and
2. a secondary standard set against either the heating system metric or the smart readiness metric (with landlord discretion on which secondary metric the property meets).

The government proposes this new higher standard will apply to new tenancies from 2028 and that all tenancies will be required to be compliant by 2030. However, there will be a transition period as the government proposes that PRS properties with an existing EPC C will be considered compliant with future MEES until the existing EPC expires or it is replaced with a new EPC.

Modelling carried out by the government indicates that, on average, a rental property will require between £6,100 and £6,800 worth of investment to meet the proposed new standard under the preferred metric approach. The government proposes a cost cap of £15,000 per property and, if after such expenditure, a property still does not reach the standard, the landlord can register a 10-year exemption to continue to let the property.

Even with such a cost cap, for investors with portfolios of PRS properties that would fail to meet the new higher standard, this means a significant, and potentially costly, uptake of energy retrofit to existing properties is required, or investors risk their portfolios being subject to heavy brown discounting. For more analysis on the wider impact of ESG on the real estate investment market and how to avoid ESG obsolescence, listen to our recent podcast here.

Reforming the Energy Performance of Buildings Framework

Updating EPC metrics

The government acknowledges current EPC metrics are not perfect (for example, installing a heat pump can downgrade a property's EPC rating) and proposes changing the EPC metrics in the second half of 2026.

For domestic buildings, the Energy Efficiency Rating (EER) is the current headline metric, calculated using modelled energy costs per square metre, and the government is proposing reform so that domestic EPCs use four headline metrics:

1. Fabric performance - assesses the thermal properties of the building and its ability to maintain a different temperature from its surroundings;
2. Heating system - ranks different heating systems based on their technology or type, aiming to incentivise the transition to efficient low-carbon options (including heat pumps);
3. Smart readiness - assesses a building’s potential to integrate smart technologies to optimise energy consumption; and
4. Energy cost - calculation of predicted costs of the energy used in the building, with other metrics provided as secondary information. The government believes a carbon metric would not be an appropriate primary indicator of building performance for domestic properties as they consider it would not incentivise actions to improve building performance.

In contrast, for non-domestic (i.e. commercial) buildings, modelled carbon dioxide emissions per square metre form the basis of the current Environmental Impact Rating (EIR) headline metric. The government proposes the headline metric is not changed in the short term, but it does seek views on whether a carbon-based metric should be retained or if the proposed new metrics for domestic buildings would also be suitable for non-domestic buildings at a future stage beyond 2026.

When the 2026 changes are brought into force, existing EPCs will not be invalidated so there will be a progression over time to the new metrics as EPCs using old metrics reach the end of their validity period.

In the long term, the government considers that EPC metrics may change again in the future and could incorporate other ESG related metrics, including a building’s resilience to climate change, occupant health, wellbeing, biodiversity, and water efficiency.

Changing the EPC validity period

The government proposes reducing the validity period for both domestic and non-domestic EPCs. The validity period is currently 10 years and the government seeks views on what the period should be – with options ranging from less than 2 years to maintaining 10 years. The government proposes that any new validity period would apply to new, but not existing, EPCs. More frequent assessments could result in additional costs for investors.

When EPCs are required

The government proposes to extend when an EPC is required to include:

1. when an existing EPC expires for private rented buildings. Currently in both the private and social rental sectors when an EPC expires, a new EPC is only required when a property is re-let and not when the same tenant renews or extends their lease;
2. when a building is marketed for sale or let;
3. short-term rental properties having a valid EPC at the point of being let; and
4. all heritage buildings with recommendations tailored for heritage buildings.

Impact on Investors in the Living Sector

The living sector is continuing to be a real focus for investors with continued interest in PRS and single-family housing- to which the new higher MEES standard will apply.

Investors should:

• consider responding to the government's consultations with any concerns regarding the new EPC metrics or the proposed new higher standard for PRS properties;
• plan to incorporate the proposed new standard and metrics into their benchmarks against which potential acquisitions are evaluated and, if properties do not meet the new minimum standards, the scope required to bring the properties to meet the standard should be quantified and factored into the acquisition process. For many investors this will require little change as many already require a minimum EPC rating of B or C together with other ratings benchmarks, such as a 4-star BREEAM Housing Quality Mark; and
• evaluate their existing portfolios to identify what, if any, energy retrofitting will be required to bring those properties up to the new standard.

What about Commercial Properties?

The government has made improving the private and social rental sectors a top priority so it is not surprising the first MEES consultation focuses on the PRS.

EPCs, together with other sustainable building certifications (such as BREEAM and NABERS), are increasingly used in ESG reporting and investing so it is a positive step that the government is consulting on how EPCs can be improved and how they can serve as a tool for promoting carbon reduction across the built environment through encouraging energy efficiency improvements.

This MEES consultation is hopefully the start of more announcements in this area; particularly with respect to the commercial sector (including offices, data centres, logistics, PBSA, retail and hotel sectors) where clarity is needed for real estate investors and developers.  Although it seems the current carbon-based metric will remain the same for now, it is still not clear whether the minimum EPC threshold for these properties (currently Band E) will increase to Band C in 2027 and Band B in 2030. If the carbon-based metric is retained, it will also be interesting to see whether there will be any alignment with the forthcoming UK Net Zero Cabon Buildings Standard.