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18 JUN 2018

EPC: landlords under pressure

As the domestic Minimum Energy Efficiency Standards begin to be enforced, Melanie Kendall-Reid considers the pressure these put on landlords.

On 1 April, 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 let private properties that do not achieve a minimum energy efficiency standard.

Energy performance certificates (EPCs) indicate how efficient a building is using ratings from A to G, with A being the most efficient. The standards require landlords to have secured an E rating or higher for them to be able to renew an existing lease or issue a new one for a property, in whole or part. From 1 April 2020, there will be a further requirement preventing continuation of a lease where the EPC is rated below E. The maximum fine for non-compliance is £4,000, along with publication of the breach, and local authorities are responsible for enforcement.

The maximum fine for non-compliance is £4,000, along with publication of the breach, and local authorities are responsible for enforcement.

Legislation scope

The legislation applies to assured tenancies, including shorthold, to tenancies that continue to be protected under the Rent Act 1977, and to 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 fall under the scope of MEES; however, if the EPC has expired and there has been no trigger point for its renewal, such as a sale, or being advertised for rental, the legislation does not apply.

Listed buildings that are not required to have an EPC are not under the MEES’ scope, neither are temporary buildings with a planned use of less than two years and stand-alone buildings with a useable floor space of less than 50 sq m.

Where a landlord believes that a non-compliant property should be exempt from the MEES, this must be registered on the national private rented sector (PRS) exemptions register. This 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 (DBEIS) 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 substandard
  • 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, domestic tenants have since 1 April 2016 had the right to request efficiency improvements that a landlord cannot unreasonably refuse. This is subject to the “no cost to landlord” rule; that is, the changes will not be funded by the landlord but may be paid for by the tenant through grants. Landlords are expected to have an E rating or get as close as possible using available third-party finance, such as the Green Deal or Energy Company Obligation funding.

Improving efficiency

The UK government has made it clear that it intends to continue in its drive to improve the energy efficiency of private domestic rental stock. An estimated 280,000 properties do not meet the new E-rating standard, according to modelling from the 2014 English Housing Survey.

The Energy Company Obligation, a government energy efficiency scheme in Great Britain that aims 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. Furthermore, with the Green Deal discontinued, funding is simply not being made available to tenants to address this issue. DBEIS has stated: “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 to improvement measures. In a recent consultation, DBEIS 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 DBEIS analysis in the consultation, the average cost of improving an F- or G-rated property to achieve an E rating is likely to be £865. Some specialists have been calling for the cap to be set at £5,000, suggesting that this would double average energy bill savings and enable 35,000 more homes to be brought up to the minimum standard. The consultation closed on 13 March, and further guidance is expected to be issued 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 that compliant EPCs are in place before they agree to loans.

Recommended actions

The question we as energy management consultants are often asked is, what can be done to minimise the pain? 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, for instance 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 can research these when an assessor requests, they will ensure that every point they can achieve is recorded – which may make the difference between a C and an F rating, for example.

Modelling a draft EPC is often a positive approach, because it enables the identification of properties at risk of non-compliance before the certificate is due. The recommendations for improvement can then be implemented, to ensure the maximum benefit before the assessment for the new EPC is carried out.

The important point to remember is that this legislation does not have a hard starting point, since 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 of EPC expiry dates, the dates when leases are due for expiry or renewal and the works that are required for general property maintenance, they can implement a plan to ensure that properties are prioritised and works can be budgeted ahead of the compliance deadline.

The EU recognises that the energy required for heat and power contributes significantly to its carbon footprint and that most existing buildings will remain in use well into the future. 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. Yet a key barrier to efficiency improvements has been identified by the EU in relation to rented properties, in that it is often the landlord who is responsible for funding improvements, but the tenants who 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 coming years. By adopting a positive approach to compliance and improving energy efficiency in privately rented properties, landlords can enhance their investment and protect their yield.

Melanie Kendall-Reid is compliance director at Carbon2018.

This article first appeared in the RICS Property Journal (May/June 2018)