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 tenanciesand landlords must not continue to let a sub-standard property, even to an existing tenant.
What does this mean?
Landlords should take proactive steps to assess their letting portfolios. Arranging for an EPC survey to establish current energy efficiency ratings will:
provide peace of mind that the property has an E rating or above and therefore no improvements are currently required in order for it to comply with MEES (noting that it is worth obtaining the EPC in draft form only – if the rating slips from that in an existing EPC, it is worth considering whether to register the new rating)
flag recommended improvements that need to be carried out whilst allowing sufficient time for the landlord to budget for these and plan for vacancies or arrange for access to carry them out in advance of April 2020
provide the opportunity to identify and register any exemption from the MEES requirements (these are available only in limited circumstances) on the PRS Exemptions Register
help with decisions on lettings. MEES applies to all tenancies except short term lets of six months or less and long leases of 99 years or more.
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.
Covering the cost of improvements
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.
Early action is recommended to minimise any void periods required for the necessary works to be carried out and to mitigate any potential impact on marketability for letting and/or sale. The cost of an assessment is relatively modest, generally no more than £100, and can usually be arranged through a letting agent.
Lenders should be alert to the potential impact on the value of a property that does not have at least an E rating.
Consider the potential impact of any necessary consents for efficiency improvement works. Landlords of leasehold properties will need to consider if consent if required from a superior landlord under the terms of the property's lease. Owners of listed properties may need consent for works from the local planning authority.
Review the available exemptions and register entitlement to these where applicable. Purchasers of investment property for example have a temporary six month exemption where it becomes the landlord as the result of a purchase, similarly if the tenancy is granted as the result of a contractual obligation.
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.