Minimum energy efficiency requirements for residential investment property

Minimum energy efficiency requirements for residential investment property

Published:

Author: Peter Williams

Applies to: England and Wales

The Government has issued guidance on how the Minimum Energy Efficiency Standard regulations will apply to residential properties

There appears to be a relatively high level of knowledge about how the Minimum Energy Efficiency Standard regulations (MEES) are going to apply to commercial investment properties, when they take effect in April 2018. However, the same cannot be said for owners of residential investments. Yet the start date is the same: MEES will apply to new lettings of residential property from April 2018, which is less than six months away. Even more importantly, by April 2020, all owners of let residential properties will either have to ensure that their properties have an EPC rating of E or above, or they will have to register an exemption on the exemptions register. Failure to comply could land them with a penalty of up to £5,000.

It is therefore appropriate that the Government department responsible for MEES, the Department for Business, Energy and Industrial Strategy (BEIS), has recently issued a hefty guidance document for landlords and local authorities on the minimum level of energy efficiency required to let domestic property ('domestic' is the term used in the MEES regulations to refer to residential property). The document is almost 100 pages long, including appendices, but it makes essential reading for anyone involved in residential investment. This will include huge numbers of buy-to-let investors, many of whom are likely to own only a small number of properties, perhaps as few as just one or two.

The Guidance states that the average annual cost of energy for a property with an EPC rating of G is £2,860 whereas that for a property with an E rating is £1,710 - a difference of over £1,100. So it believes that there is good reason to push landlords into improving the energy-efficiency of their properties - where this can be done at no cost to themselves, as explained below.

Obligations on residential landlords

MEES for residential properties will operate in a similar - but not identical - manner to MEES for commercial properties. The differences are absolutely vital, however. This article can cover only the basics, and so anyone who needs to understand MEES fully is advised to read the guidance from the Government.

Here is a brief summary of the requirements:

Which properties are covered?

MEES applies where a residential property is let under an assured tenancy (including assured shorthold tenancies), a regulated tenancy (of which there are relatively few left now) or certain agricultural tenancies.

However, low-cost rental accommodation is excluded where the landlord is a private registered provider of social housing, and low-cost home ownership accommodation is excluded. Bodies registered as social landlords under the Housing Act 1996 are also excluded.

A property falls within MEES only when it has a current EPC (which will be the norm, as an EPC has been needed for any lettings since 2007). Listed buildings may be exempt but the regulations are very unclear on this, and so the guidance cannot be any more help.

What are landlords required to do?

From 1 April 2018, where MEES applies, landlords will not be permitted to grant a lease of a residential property with an EPC rating below E unless they have made all required energy efficiency improvements, or an exemption applies.

From 1 April 2020, this is extended to all let residential properties, including those where leases were granted before 2018.

At present, required energy efficiency improvements are those that are listed in an EPC recommendations report, but only where funding is available to cover the full cost of purchasing and installing the improvements from one of the following sources, or a combination of them:

  • a Green Deal plan
  • the Energy Company Obligation (ECO)
  • funding provided by central government, a local authority or a third party

The Green Deal is a financing mechanism designed to enable landlords to pay for energy efficiency improvements and to pass the cost of repayment to their tenants. It will only be available where the energy savings will exceed the cost of repaying the loan (the so-called 'golden rule'). The Green Deal was originally financed by the Government, but it was withdrawn by the Treasury in August 2015 (see the Audit Commission's Report on the Green Deal and the Energy Company Obligation to understand why it was withdrawn). It was recently re-started under private ownership and Green Deal plans are currently available through at least three of the organisations that are listed on the Green Deal Finance Company's website. However, it seems unlikely that this funding will be sufficient for all the properties that need to be improved.

The Energy Company Obligation (ECO) is a requirement that the Government places on energy suppliers to reduce the UK's energy consumption and support those living in fuel poverty. It does this by requiring energy suppliers to provide households with energy efficiency improvements. Obligated energy suppliers have carbon savings and heating bill savings targets that they are legally required to meet. The current obligation will run until September 2018. The Government plans to consult on a new long-term obligation early next year.

Where there are no required works that can be done at no cost to the landlord, or where all required works have been done and the property is still below an EPC rating of E, the landowner is then allowed to grant a lease. However, the assessment will need to be repeated after five years.

What exemptions are available?

The regulations contain a number of exemptions, most lasting for five years. The exemption, with supporting documentary evidence, has to be logged on a register that will be publicly searchable (at least in part). Exemptions are not inherited by a future buyer of the property.

The main exemptions are that:

  • All required works have been carried out but the EPC rating is still below E;
  • The necessary works cannot be wholly financed at no cost to the landlord;
  • Consent is required to carry out the works and that consent cannot be obtained or is subject to unreasonable conditions. This may be consent from the tenant, or third party consents such as planning consent or consent from a lender;
  • An independent surveyor certifies that carrying out the works would result in a reduction in the market value of the property by more than 5%;
  • A suitable expert states that carrying out insulation work on external walls would have a 'negative impact' on the property (presumably by trapping moisture inside the building).

What are the penalties for non-compliance?

As with EPCs, enforcement of the MEES regulations will be carried out by local authorities. Penalties will be civil rather than criminal penalties. The penalties can be as high as £5,000 for each breach.

The Government's Guidance document

The Government's recently issued guidance contains some helpful advice to landlords about the implications of MEES and the occasions on which it will apply.

This includes an explanation on how MEES applies to a letting of an individual non-self-contained unit within a property (such as a bedsit). No EPC is needed for such a letting, as it is not a separate dwelling. However, if the property as a whole happens to have an EPC, then MEES will apply to lettings of each part of the property. So, in this example, the letting of the bedsit would be caught.

It also states that a building that is not a single dwelling will be covered by the commercial variant of the MEES regulations (which contain more onerous requirements on landlords). This could include the letting of a whole block of flats, for example, which will be treated as a commercial property, not a residential one. See our article Guidance on Minimum Energy Efficiency Standard published for how MEES applies to commercial properties.

The guidance also contains a useful chapter containing basic technical advice on making energy efficiency improvements to houses and flats. Its main purpose is to prevent landowners damaging their properties by carrying out inappropriate works. For example, creating thermal bridges where an element with insulation adjoins an element without insulation is a particular concern. The guidance advises that while a single measure, such as insulating solid walls or updating a heating system, may be sufficient to achieve an E rating, it is better to seek professional advice on effectively combining measures using a whole house approach.

Expected consultation on changes

Even though MEES has not yet come into effect, the Government is talking about changes. In a massive document entitled The Clean Growth Strategy issued on 12 October 2017, the Government says:

'For privately rented homes, we have legislated so that from April 2018, landlords of the worst performing properties will need to improve those properties to a minimum of EPC Band E before they can be let, lowering bills for some of the most vulnerable private tenants while ensuring costs of improvements are reasonable and affordable. We will consult shortly on steps to make these regulations more effective.' (emphasis added)

'The Government will look at a long term trajectory for energy performance standards across the private rented sector, with the aim of as many private rented homes as possible being upgraded to EPC Band C, by 2030, where practical, cost-effective and affordable.'

It also says that it wants to work with mortgage lenders to incorporate energy efficiency into their lending decisions, and to look at incentives and other levers that could encourage homeowners to invest in energy efficiency improvements.

There is also a comment that it could be possible to extend EPCs to other trigger points, and that the Government intends issuing a Call for Evidence by spring 2018 seeking views on this, as well as wider views on how EPCs can be further improved.

The Department of Energy and Climate Change may have been subsumed within BEIS, but energy efficiency and sufficiency is clearly still near the top of the Government's agenda. This is clearly only the start of a very long journey.

Guidance document for landlords and local authorities on the minimum level of energy efficiency required to let domestic property

Disclaimer

This document is for informational purposes only and does not constitute legal advice. It is recommended that specific professional advice is sought before acting on any of the information given.