Residential landlords will be required to spend up to £3,500 of their own money improving the energy efficiency of their properties.
The Minimum Energy Efficiency Standard (MEES) for properties that are to be let came into force on 1 April 2018. The regulations apply to both commercial and residential properties but this article considers only the rules relating to residential properties.
Under the current legislation, landlords of so-called sub-standard residential properties (those with an EPC rating of F or G) are required to upgrade the energy efficiency of their properties only if this can be done at no cost to the landlord. The regulations envisage that this will be achieved by way of one or more of a Green Deal finance plan, the Energy Company Obligation (ECO) or a local authority grant.
However, the Green Deal – an innovative funding solution under which a landlord borrows money to undertake specified energy efficiency improvement works – was effectively withdrawn in 2015 when the Treasury refused to continue to fund it. There are currently some Green Deal providers but not sufficient to carry out all the works that are expected to be required.
We explained in our article “Change proposed to how MEES will apply to residential property” that the government is keen that residential landlords should have some obligation to carry out works. Initially, it was proposed that landlords of sub-standard residential properties should contribute towards the cost of improving their energy efficiency, but with a cap on their contribution of £2,500 per property.
In a response to that consultation, on 5 November 2018 the government confirmed that it will be proceeding with this proposal, but with a landlord’s cap of £3,500 rather than the figure of £2,500 as originally suggested. The sum of £3,500 will be inclusive of any VAT. A link to the government’s response is set out at the foot of this article.
An increase in the landlord’s cap
The government was persuaded to increase the cost of the works by the responses it received during its consultation. Only a minority agreed with the sum of £2,500. 79% of respondents recommended a higher cap, ranging from £3,500 to £5,000, or no cap at all. Almost half the respondents recommended a cap of £5,000. The government says that average cost of works to bring a property up to an E rating is £1,200.
The government’s modelling shows that a cap of £3,500 will enable 48% of sub-standard properties to be improved to an E rating (as opposed to 32% when the cap was proposed to be £2,500). It estimates there are currently about 290,000 rented residential properties with F and G ratings, so some 139,000 properties will be brought to an E rating.
These changes will take effect from a date in 2019 yet to be announced. The date proposed at the time of the consultation exercise was 1 April 2019, but presumably this is now not achievable. The guidance from the government on how MEES applies to residential landlords will need to be updated.
Impact on landlords
Once the changes are in force, the new rule will apply to new lettings and tenancy renewals. Where 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 setting out the extent of the works that have been carried out. If the landlord has not been able to carry out any energy efficiency improvement works – where there are no works listed in the EPC recommendations report that cost less than £3,500 – then the landlord will need to include three quotes from builders in the exemption evidence. The government says that this is to “reduce the risk of false or misleading exemptions being reported”.
Residential landlords need to remember that by 1 April 2020, which is the so-called “backstop date” for residential properties, all landlords with sub-standard properties will need to have either spent up to £3,500 to bring their properties up to an E rating, or registered an exemption. Any existing exemptions already registered on the basis that it has not been possible to obtain “no cost” financing will cease to apply on 1 April 2020 and landlords will be subject to the new requirements.