The interminable wait for news on phase 2 of Non-Domestic MEES continues. I’ve not given up hope that we’ll get an announcement this Autumn, despite rumours that DESNZ is considering abandoning its plans due to the costs and benefit relative to potential political harm.

We’ve already been told that the government’s original plan to mandate achieving a B by 2030, with an interim deadline of EPC C by 2027, could be postponed by a year. In fact, I believe that the interim band C will be abandoned in favour of a single target of EPC band B.

Many lenders only focus on EPC ratings for buildings’ risk profiles because of MEES, so this might come as a relief to both them and commercial landlords if the government decides to abandon its deadlines. However, there’s still an appetite for investing in green improvements. Handelsbanken’s recent report found that an overwhelming 92% of UK property investors believe tenants are willing to pay more for greener homes and commercial premises. Its UK Chief Economist James Sproule, declared:

“If you’re investing in property, sustainability isn’t optional anymore, it’s essential.”

Any alternative to EPCs – currently being investigated as part of the Energy Performance of Buildings consultation using different metrics such as fabric efficiency for domestic properties or an alternative metric to carbon for commercial properties – will undoubtedly be a more costly, time-consuming and involved process. In the meantime, there’s no getting away from the fact that despite a lack of legislative clarity, EPCs aren’t just a regulatory checkbox and continue to be a material factor that lenders and investors weigh up during valuations and loan approval processes.

Shawbrook acknowledges that while EPCs are one of several factors it considers, in parts of the market such as prime offices for corporate firms, they can be critical, especially where sustainability targets are central to the occupier’s strategy. Tenants want good scores to reduce operational costs and meet their own sustainability goals, while valuers and lenders see A-C ratings as more attractive for yield potentialand asset liquidity.

After all, a poor EPC rating can hamper landlords’ chances of getting financing as many lenders base their decision on anticipated retrofit costs and limited rental appeal and might offer smaller loans or increased equity requirements. Loans could attract higher interest rates but at worst, commercial mortgage applications might be rejected or delayed if the EPC doesn’t hit the mark.

In the residential sector, many lenders’ EPC-related products such as green mortgages and loans designed to reward customers are now mainstream and offer lower rates for landlords buying properties with EPC ratings of A-C, as well as on remortgages. However, somewhat alarmingly, research by Cotality reveals some could start declining all five-year fixed-rate buy-to-let mortgages on properties rated below band C. (Legislation is set to enforce a minimum C EPC rating on all properties starting a new private rental tenancy agreement from 2028 and for all private rented homes from 2030.)  It reckons the preference for properties with EPCs of C and above is creating a two-tier market where higher-rated properties attract competitive finance while sub-C properties face severely limited options, forcing many landlords to sell up.

Paragon Bank queries how many five-year fixed mortgages for new tenancies might be being written on properties that could potentially fall foul of this new legislation. If lenders decide to lend only on A to C rated properties, it predicts this could cut lending down by 50% overnight, while only offering two-year products that can be rolled on would bring challenges because of the different rules for affordability on five versus two years.

I expect we’ll also see this trend for restrictive lending in the commercial sector, and if major lenders follow suit, there would be a big reduction in lending volume. EPC rated D–G landlords could find their assets left in limbo. According to the British Property Federation, 83% of commercial properties in England’s major cities – London, Birmingham, Bristol, Leeds, Liverpool, Manchester and Newcastle – have an EPC rating of C, so that’s a huge number of buildings that could be impacted by, or excluded from, financing, particularly if the government makes good on its promise to update the Non-Domestic MEES.

It’s not always easy for some clients to keep energy efficiency goals front of mind, but regardless of the elastic Non-Domestic MEES deadline, we continue to press home the importance of working towards those predicted targets to keep their assets compliant and future-proof. Let’s hope that David Miliband’s warning to MPs this week that the “British way of life” would be threatened without embracing net zero policies, is a promising indication that the wait could soon be over.