The government has released a consultation on the domestic aspects of The Energy Efficiency (Private Rented Property)(England and Wales) Regulations 2015 (the MEES Regulations). If the proposals are implemented, we would see an end to the current position where landlords of domestic properties can benefit from an exemption if works cannot be wholly financed without any cost to the landlord. The intention is to introduce a requirement for landlords to spend up to £2,500 per property on carrying out energy efficiency improvements.
From 1 April 2018, a landlord of a property with an EPC rating of below E (known as a sub-standard property) will be prohibited from granting a new tenancy of that property unless an exemption applies and has been validly registered. This prohibition is extended on 1 April 2020, from which date it will be unlawful to continue to let a sub-standard domestic property (provided that there is a valid EPC in place on that date) unless an exemption applies and has been validly registered.
The MEES Regulations, as currently drafted, enable the landlord of a sub-standard domestic property to lawfully let that property if all relevant energy efficiency improvements have been undertaken, or there are none that could be made. Works will only fit within the definition of a relevant energy efficiency improvement if they can be wholly financed without any cost to the landlord.
When the MEES Regulations were drafted, it was anticipated that domestic landlords would be able to access Green Deal finance in order to carry out energy improvement works. The government's withdrawal of support for the Green Deal in 2015 rendered certain aspects of the MEES Regulations redundant. As the MEES Regulations stand, the improvement of sub-standard domestic properties cannot be achieved where any cost would be involved. In such cases the landlord can claim an exemption.
The consultation anticipates an end to this position - landlords will be required to spend up to £2,500 per sub-standard property in trying to bring it up to an E rating. Whilst this may not seem a huge amount, landlords with large portfolios of sub-standard properties could be hard hit.
It is intended that the £2,500 cap be inclusive of VAT as domestic landlords cannot charge VAT on rent so cannot recover VAT in the same way that commercial landlords can.
It is also proposed that the £2,500 be inclusive of any third party funding that can be obtained (e.g. ECO: Help to Heat). Therefore, if a landlord can obtain £1,000 in third party funding, it would only be obliged to contribute an additional £1,500 from its own resources. This has been subject to some criticism from green campaigners, who have expressed the view that funding from third parties should not be included within the cap. Their view is that as the cap is intended to remove a financial burden on landlords, third party funding should be disregarded. It remains to be seen whether their views will affect the outcome of the consultation.
The consultation states that the government intends to bring in the obligation on landlords to pay for works from April 2019.
The PRS Exemptions Register has been open since 1 October 2017, so some landlords may already have registered what is known as the "no cost" exemption. With the fast approach of the 1 April 2018 deadline, the number of landlords registering such an exemption will increase. Once registered, the exemption lasts for five years.
Therefore, if a landlord registered an exemption on 2 April 2018 this would not expire until 1 April 2023.
The consultation suggests that the exemption should be curtailed and should end when the amended regulations come into force on 1 April 2019.
Is it suggested that a landlord would need to obtain three quotes to show that the cost of works exceeds the cap. This mirrors the procedure for non-domestic properties. Some domestic landlords will argue that this creates an administrative burden for them. It will certainly create more work than simply showing that works cannot be financed without cost to the landlord (which will be the case unless third party funding is available).
However, the intention of the MEES Regulations is to improve the energy efficiency of our buildings. Since the demise of the Green Deal, the MEES Regulations do not really oblige domestic landlords to do anything, other than register an exemption. Therefore, in order to move towards improved energy efficiency in domestic rented properties, this needs to change.
If a landlord was carrying out any works, it would be likely to obtain a number of quotes, so this aspect of the consultation is unlikely to result in an undue burden. It is more likely that landlords will oppose the spending of up to £2,500, rather than the obtaining of quotes.
Lenders are already looking closely at the EPC ratings of properties as part of their decision to lend. Some lenders are already including obligations to carry out works as a condition of loans. Therefore, the fact that landlords are going to have to spend up to £2,500 per property on energy improvement works to sub-standard domestic properties may not have any real impact.
Receivers will need to ensure that they are complying with the landlord's obligations under the MEES Regulations. This could mean that they could be obliged to obtain quotes for energy efficiency works and either arrange for them to be carried out, or register an exemption.
It is not yet clear whether the proposed amendments will have much of an effect on the buy-to-let market. It is possible that there is a proportion of landlords purchasing sub-standard domestic properties with a view to letting them out, possibly to those on a limited budget. However, with lenders becoming more reluctant to provide finance for sub-standard properties, only time will reveal the impact.
It remains to be seen whether the introduction of a requirement for landlords to pay for works will improve the energy efficiency of our housing stock.
The consultation estimates that there were 280,000 properties in England and Wales with an EPC rating of F or G in 2016. It also states that with a cap of £2,500 on landlord's expenditure, it is estimated that 85,000 homes would reach an E rating. This leaves a significant number still with F and G ratings.
It is unclear how these figures are arrived at, and whether they take account of the fact that there will be a proportion of homes that cannot be improved to an E rating because they are, for example, listed or in a conservation area.
Whether the changes will have an impact on the wider housing market also remains to be seen. If a landlord has to spend money on energy improvement works, that landlord is likely to demand a higher rent. The tenant will be occupying a more energy efficient property and the higher rent may be offset by lower energy bills. However, in some areas, where those on low incomes are already struggling to afford rent, it could lead to them being squeezed out of the private rented market. Will this lead to further demand for affordable housing?
The consultation closes on 13 March 2018, and we will continue to monitor and report on developments.
Contributor: Alexandra Holsgrove JonesThis publication is intended for general guidance and represents our understanding of the relevant law and practice as at December 2017. Specific advice should be sought for specific cases. For more information see our terms & conditions