Improving the energy efficiency of private rental sector homes is about to get costly for landlords
Investors in the residential private rental sector may be about to incur potentially significant bills for the costs of improving the energy efficiency of their properties. The Government is consulting on whether to reverse the principle that has been central to the energy efficiency regime to date; that of ‘no cost to the landlord’.
Minimum Energy Efficiency Regulations
The built environment is a major source of the UK’s greenhouse gas emissions. In recognition of this, chapter 2 of Part 1 of the Energy Act 2011 required measures to be enacted to improve the energy efficiency of both domestic and non-domestic buildings in the UK private rental sector.
One piece of the jigsaw was the introduction of the Energy Efficiency (Private Rented Property) (England and Wales) Regulations 2015 (the “MEES Regulations”). A key aspect of the MEES Regulations is the prohibition on letting either domestic or non-domestic property in the private rental sector which has an F or a G rating on its energy performance certificate (“EPC”), subject to certain exemptions. This is to be phased in, so that in relation to those properties it will be illegal to:
- grant a new tenancy, extend or renew an existing tenancy of a domestic or non-domestic property on or after 1 April 2018;
- continue to let a domestic property on or after 1 April 2020; or
- continue to let a non-domestic property on or after 1 April 2023.
Exemptions for residential property
There is detailed information about the MEES regime as it affects residential property in the DBEIS guidance note published in October 2017. Broadly, the prohibitions do not apply to domestic property which qualifies for one of the following exemptions:
- all the “relevant energy efficiency improvements’ for the property have been made (or none can be made) and the property remains sub-standard;
- the relevant measures cannot be wholly financed at no cost to the landlord;
- the relevant measures involve wall insulation, which might damage the fabric or structure of the particular property;
- the landlord cannot do the works without third party consents, which have not been provided;
- the works would reduce the market value of the property by more than five per cent; or
- the owner has only recently become a landlord.
If a property appears to have been let in breach of the MEES Regulations, the local authority can issue a compliance notice requesting information, can impose financial penalties on the landlord and can publish details of the breach on the national PRS Exemptions Register.
There is also another angle to enforcement – a section 21 notice to end an assured shorthold tenancy cannot be served until the landlord has complied with certain legal obligations which include providing the tenant with a copy of the EPC and the Government guidance note “How to Rent”. Together with the online Exemptions Register, tenants will be able to see for themselves whether their landlords have complied with the MEES requirements and can use this information to resist eviction.
What is being proposed in the new consultation?
Until now, energy efficiency improvement works have only been necessary if the landlord could obtain full funding for such works from a Green Deal finance plan, the Energy Company Obligation or a local authority grant. The Government has realised that these sources of funding will be insufficient for the task, so proposes that from April 2019 it will remove the “no cost to the landlord” principle, and instead require landlords to spend up to £2,500 per property on carrying out the energy improvement works recommended when the EPC was issued. If this expenditure is insufficient to bring the EPC rating up to E, the landlord can register an exemption, which would last five years.
What will this mean for residential landlords?
Landlords of new-build properties should not be adversely affected by these proposals as their EPC ratings will already be above an E. For landlords of older properties, however:
- any existing exemptions registered on the basis of the “no cost to the landlord” principle would not be valid after April 2019;
- the £2500 cap will be per whole building or per let unit, which could amount to a substantial sum for an older block of flats, flats within an older mixed-use block, or a block of flats which has been converted to residential from offices.
- if the property is not awarded an E or above rating after the initial £2500 spend and a 5-year exemption is registered, another tranche of expenditure will be required when that expires.
What will this mean for the construction sector?
Residential landlords may be about to commission a large number of energy improvements, for example the Government estimates that 92,000 properties will have electric storage heating installed, 51,000 will see heating controls fitted, 50,000 will have draught-proofing installed, 45,000 properties will have their floors insulated and 13,300 properties will have cavity wall insulation fitted.
More importantly, if this proposal is implemented it will push investors into the PRS sector towards buying new-build housing rather than renovating older housing stock, which will further fuel the growth of build-to-let.
Kofi Atta is head of construction at Travers Smith