15. März 2019
For just over ten years, a valid Energy Performance Certificate (EPC) has been required before a residential property can be marketed for sale or letting. Changes introduced last year however are having a dramatic impact on letting strategies, and the clock is ticking for landlords to bring their buildings up to the necessary energy efficiency standard.
Providing theorised running costs and a standardised rating to assist potential buyers or tenants in making comparisons, EPCs rank a property's energy efficiency using a sliding scale from A (most efficient) to G (least efficient).
EPC assessors examine key features such as loft insulation, cavity wall insulation, heating equipment and windows to list key recommendations for owners to save money and improve the energy efficiency, and once obtained, EPCs are placed on a publically available register, maintained by central government, so that they remain valid for ten years.
From 1 April 2018, in keeping with its Clean Growth Strategy, the Government introduced minimum energy efficiency standard (MEES) with the effect that all residential properties must meet a minimum E rating in order to be lawfully let.
This meant that overnight it became unlawful to grant a new residential tenancy in a property with an EPC rating of F or G (both "sub-standard ratings"). The MEES restriction bit on renewing existing tenancy as well, although not where tenancy agreements continue beyond their fixed date without any formal renewal (ie they become "periodic").
But the MEES trap is tightening. From 1 April 2020, the minimum rating of E will apply to all existing tenancies and landlords must not continue to let a sub-standard property, even to an existing tenant.
Landlords should take proactive steps to assess their letting portfolios. Arranging for an EPC survey to establish current energy efficiency ratings will:
Enforcement of the MEEs regulations is by the local authority with financial penalties of £5,000-£150,000 per property in breach (according to its rateable value). The validity of the tenancy granted will not be impacted, however.
The MEES regulations are clear that landlords of sub-standard properties are required to fund the cost of improving energy efficiency, albeit with a recent cap of £3,500 to spend on works per property. Recommended improvements might include such measures as installing double glazing or insulation, and the Government's modelling suggests that there is enough headroom within this cap for 48% of substandard properties to be improved to an E rating.
In the event that a landlord is unable to bring the EPC rating of a property up to an E rating, even by spending £3,500, it will need to register an exemption and set out the extent of the works that have been carried out.
It's fair to say that the detailed content of an EPC has not always generated too much excitement in buyers of rental investments. They have largely been relegated to a low priority within the due diligence undertaken on the acquisition of a property, but this has changed with the impact of MEES.
Whatever happens with BREXIT, there is little expectation that these regulations will be a temporary presence. The origin of much of the UK's environmental legislation has been the EU and yet MEES is a UK-led initiative, which is only likely to tighten as the government seeks to get to grips with its carbon reduction targets. This is good news for residential tenants but in the short term could be costly for some landlords.
von Lisa Bevan und Alison Cartin
von Lisa Bevan