From 1 April 2020 landlords of residential properties are subject to new energy efficiency requirements.
Continuing leases – change from 1 April 2020
From 1 April 2020, provisions in The Energy Efficiency (Private Rented Property) (England and Wales) Regulations 2015 (“Regulations“) mean that any landlord of residential property (falling within the definition of “domestic private rented PR property” detailed below) with an EPC rating of F or G will be in breach of the Regulations if they:
a) continue to let the property beyond 1 April 2020 to an existing tenant; or
b) the landlord has not registered an exemption to compliance with the Regulations.
Background
The Regulations introduced the Minimum Energy Efficiency Standards (“MEES”), with a view to encouraging landlords to improve the energy efficiency of buildings. MEES for a property is an EPC rating of E. An EPC rating of F or G is regarded as “substandard” under the Regulations. The MEES Regulations relate to an EU Directive which still applies following Brexit and are seen as a measure to help the government work towards its ambitious goal of at least a 20% reduction in business energy use by 2030 and net zero emissions in the UK by 2050.
MEES Regulations apply to “domestic private rented (PR) property” (i.e. some but not all residential property) as well as “non-domestic private rented property” (commercial property).
Domestic PR property
To fall within the definition of domestic PR property, a property must:
- be let under a qualifying type of tenancy e.g. an assured tenancy for the purposes of the Housing Act 1988 (also known as an assured shorthold tenancy or “AST“), a regulated tenancy for the purposes of the Rent Act 1977 and any other type of tenancy specified by statutory instrument. It is thought that the MEES Regulations do not apply to licences or tenancies at will, or to leases of second homes. The length of the lease term is irrelevant; the MEES Regulations will apply to all lengths, as long as the AST criteria are met i.e. certain rent thresholds for inside and outside Greater London;
- not be an excluded type of property e.g. housing providing by housing associations;
- not be let by an excluded landlord; the application of the MEES Regulations to local authority and public body landlords is reduced; and
- is required to have an EPC.
In respect of 4 above, there is some ambiguity with listed buildings and property in a conservation area. This is because an EPC is not required for a such properties if energy improvement requirements would “unacceptably alter [the property’s] character or appearance”. However there is a lack of clarity as to what this phrase means and so it is safest to work from a starting point that a property which is listed or in a conservation area must have an EPC.
Grant of new leases
From 1 April 2018, landlords whose properties are classed as “substandard” and do not fall under the exemptions mentioned in more detail below have been unable to grant new leases. Landlords are therefore incentivised to carry out “relevant” improvements to their properties.
Costs cap
Prior to 1 April 2019, a no costs exemption applied to domestic PR property. This meant that an energy efficiency improvement only qualified as a “relevant” energy efficiency improvement where the cost of purchasing and installing it was capable of being wholly financed “at no cost to the landlord”. However following this date, the no cost exemption no longer applies and instead a cap on the amount landlords are obliged to spend on energy efficiency improvements to bring the property up to MEES was put in place. As a consequence landlords will need to carry out energy efficiency improvements and incur expenses up to the cap of £3,500 (including VAT) to privately rented residential properties which are substandard.
Exemptions
An exemption to the MEES Regulations will apply where the property meets the relevant criteria and the landlord has validly registered the exemption on the National PRS Exemptions Register. Examples of where an exemption will apply are:
- all the relevant energy efficiency improvements for the property have been made (or there are none that can be made) and the property remains substandard. Government guidance states that where a landlord seeks to be included on the National PRS Exemption Register, they must submit quotes from three different installers each providing evidence that the costs of required energy efficiency proposals is greater than the spending cap;
- in respect of relevant improvements consent (from for example a superior landlord or planning authority) is needed and cannot be obtained. This is known as the consent exemption; and
- the relevant improvements would reduce the market value of the property by more than 5%. This is known as the devaluation exemption.
These exemptions last five years so are not long-term fixes.
Enforcement
A breach of the Regulations is not a criminal offence but results in enforcement action including financial penalties of up to a maximum of £5,000 per property.
Looking to the future
The government has signalled its intention to review the MEES Regulations. At this stage, it looks as though future proposals will include:
- the validity period of EPCs (currently 10 years) is likely to be reduced; and
- by 2025, all newly-built homes will need to be heated by a low carbon heating energy source, putting costs pressures on developers. However upfront costs will hopefully result in lower long-term energy costs in the future.
Another key date is 1 April 2023 – this is the date from when landlords of commercial property can no longer continue to let “substandard properties”.