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Easy as EPC?
From 1st April 2018, the domestic Minimum Energy Efficiency Standards (MEES) came into force in England and Wales. These were required by changes to the Energy Act 2011 that made it unlawful to rent out private rented properties that do not reach a minimum energy efficiency standard. Energy Performance Certificates (EPC) rate how efficient a building is using grades A to G (with A being the most efficient). The standards require landlords to have secured an EPC certificate with an E rating or higher for them to be able to renew an existing lease or issue a new lease for a property in whole or part. From 1st April 2020, there will be a further requirement preventing the continuance of a lease where the EPC is rated below an E. The fines for non-compliance have a maximum of £4,000 with publication of the breach and local authorities are responsible for enforcement.
The legislation applies to assured tenancies (including shorthold), ongoing Rent Act-protected tenancies and assured agricultural occupancy or similar tenancies. It is important to note that the legislation does not affect the validity or legality of the lease itself. Properties that are legally required to have an EPC are in scope; however, if the EPC has expired and there has been no trigger point for it to be renewed (e.g. construction, a sale or being advertised for rental), the legislation does not apply. Listed buildings that are not required to have an EPC are out of scope, as are temporary buildings with a planned use of less than two years and standalone buildings with a useable floor space of less than 50 square metres.
Where a landlord believes that a non-compliant property should be exempt from the MEES, this must be registered on the National PRS Exemptions Register. The register service is currently running as a pilot and landlords who wish to register a property as part of this pilot can do so with the Department of Business, Energy and Industrial Strategy (BEIS) minimum standards team.
Where granted, exemptions are valid for up to five years and include circumstances where:
- all relevant improvements have been made and the property remains sub-standard
- recommended measures cannot be wholly financed at no cost to the landlord
- the tenant refuses consent for the works
- certain wall insulation systems cannot, or should not, be installed on the property
- improvements would devalue the property by more than 5%
- a person or entity becomes a landlord suddenly and it would be unreasonable to require them to comply immediately. In this situation, they have six months to comply.
In addition to MEES, since 1st April 2016, domestic tenants have the right to request efficiency improvements that a landlord cannot unreasonably refuse, subject to the ‘no cost to landlord’ rule (i.e. the changes are not funded by the landlord but may be paid for by the tenant, via grants). Landlords are expected to meet Grade E or get as close as possible to it using available third-party funding, such as the Green Deal or Energy Company Obligation funding.
The Government has made it clear that it intends to continue its drive to improve the energy efficiency of domestic private rental stock. An estimated 280,000 properties do not meet the new Grade E standard, according to modelling from the 2014 English Housing Survey. The Energy Company Obligation, a government energy efficiency scheme in Great Britain to help reduce carbon emissions and tackle fuel poverty, is not sufficient to bring the outstanding stock of private rented homes to an acceptable level. With no current Green Deal scheme available, funding is simply not being made available to tenants to address this issue. BEIS has stated that “As a result of these shifts in the funding landscape, it is highly likely that many landlords of F and G rated rental homes will be unable to deliver improvements in line with the current regulatory requirements. This would be to the continued detriment of their tenants.”
As a result, the government is proposing to force domestic landlords to contribute towards improvement measures. In a recent consultation (http://bit.ly/2D1XQZD), BEIS recommended scrapping the ‘no cost to landlord’ rule and that the associated costs of upgrading the properties should be capped at £2,500 per property. The consultation also asked whether the exemption allowing the tenant to refuse consent for the works should be removed to avoid any opportunity for pressure from landlords.
According to the BEIS analysis in the consultation, the average cost of improving an F or G rated property to reach a Grade E is likely to be £865. Some industry specialists have been calling for the cap to be set at £5,000 and have suggested that this alternative cap would double average energy bill savings and enable 35,000 more homes to be brought up to the minimum standard. The consultation closed on 13th March 2018 and further guidance is expected to be released later in the year.
It is clear that the government intends to ensure that private domestic landlords are held to account for the energy efficiency of their properties and their contribution to fuel poverty. The minimum standards will tighten, as the Government indicated in the Clean Growth Strategy with its pledge that all rental homes will be required to have EPC ratings of C and above by 2035. Lenders have also begun putting pressure on ‘buy to let’ borrowers by demanding compliant EPCs are in place before agreeing to loans.
The question we are often asked is: what can be done to minimise the pain? Quite simply, the most important factor in gaining the best score on an EPC is ensuring that the assessor is equipped with accurate information. Where default ratings are applied (e.g. because of a lack of information), the outcome is almost always the worst-case scenario. By ensuring that landlords have the relevant details to hand or research these when asked by an assessor, they will ensure that every point they can achieve is recorded, which may be the difference between a Grade C and a Grade F, for example.
Modelling a draft EPC is often a positive approach as it gives the opportunity to identify properties at risk of non-compliance ahead of the EPC being due. The recommendations for improvement can then be acted upon, identifying the easy wins to achieve the maximum benefit before the EPC is repeated again and, once a compliant level is reached, can be lodged on the National PRS Exemptions Register.
The important point to remember is that this legislation does not have a ‘hard’ start point as compliance is required when a lease is renewed or issued. A landlord of a portfolio of properties would be in an advantageous position to develop a strategy for compliance. By maintaining visibility on EPC expiry dates, the dates when leases are due for expiration or renewal and the works that are required for general property maintenance, a plan can be implemented to ensure that properties are ranked in order of priority and works can be budgeted for ahead of the compliance deadline.
The EU recognises that the energy required for heat and power contributes significantly to its carbon footprint and that the majority of existing buildings will remain in use well into the future. In the UK, energy for heat and power in non-domestic building stock equates to 12% of all UK emissions and it is estimated that around 60% of today’s non-domestic buildings will still exist in 2050. A key barrier to making efficiency improvements has been identified by the EU in relation to rented properties, in that it is often the case that the landlord is responsible for funding improvements, but it is the tenants that benefit from the lower energy bills.
With these facts in mind, it is little surprise that the pressure on domestic landlords is set to increase over the coming years. By adopting a positive approach to compliance and delivering improved energy efficiency standards in privately rented properties, landlords can improve their investment and protect their investment yield.
RICS Property Journal: https://issuu.com/ricsmodus/docs/property_journal_may-june_2018/42