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Energy efficiency is under the spotlight in governments Clean Growth Strategy

Recently the government released its Clean Growth Strategy. On the same day, Calls For Evidence were issued on Building a Market for Energy Efficiency and the reform of the Green Deal Framework.

So what is on the horizon for property owners? Will landlords be prevented from granting tenancies of properties with EPC ratings of below C? Will the Green Deal be resurrected? Will lenders refuse to finance the purchase of properties with low EPC ratings? Read on for a summary of the key points for property owners.

Improving the energy performance of commercial buildings

The government has committed to consult on how best to improve the energy performance of private rented commercial buildings through tighter minimum energy standards.

Under The Energy Efficiency (Private Rented Property)(England and Wales) Regulations 2015 (the MEES Regulations) it will be unlawful for a landlord of a commercial property to grant a new tenancy of a property with an EPC rating of E on or after 1 April 2018, unless an exemption applies and has been validly registered. The strategy document does not detail how it is proposed that tighter minimum energy standards will operate, but it is possible that the minimum requirement of an E rating could be changed so that, in the future, landlords may be prohibited from letting properties with a higher rating (perhaps D or even C).

However, the current way of carrying out EPCs may become a thing of the past. In 2018, the government will launch a two year research project into a new methodology for measuring the thermal performance of buildings. This should, it is assumed, remove the possibility that an EPC does not accurately show the energy performance of a property.

Improving the EPC ratings of privately let domestic properties

The government has stated that it wants to improve the EPC rating of as many privately rented homes as possible to C by 2030.

Funding has been a stumbling block in the installation of energy efficiency improvements in both domestic and non-domestic properties. For a short time, finance was available for domestic properties via the Green Deal. However, in effect, this source of finance was removed in July 2015. The framework has remained in place and, in January 2017, the government sold the business and assets of the Green Deal Finance Company to a private investor. Therefore, there is still potential for Green Deal funding.

The Call for Evidence on the reform of the Green Deal Framework, issued last week, seeks views on simplifying the scheme. It also sets out suggestions for financing energy efficiency works, and invites views on the following suggestions:

  • Low interest loans;
  • Home equity loans (along the lines of the pilot scheme being run by the Scottish Government);
  • Conditional mortgages (offered on the basis of energy efficiency works being carried out); and
  • Direct subsidy.

MEES Regulations for domestic properties

The strategy also sets out ‎the government's intention to consult on how to make the MEES Regulations more effective in respect of domestic properties.

Whether the government will also seek to amend the MEES Regulations in respect of non-domestic property remains to be seen. It may be that the government's view is that the MEES Regulations are effective as they stand for non-domestic properties.

As currently drafted, landlords of domestic properties do not need to do improvement works if they cannot be financed at no cost to the landlord. This could be set to change and domestic landlords may find themselves obliged to invest in energy improvement works. However, it is likely that the intention is that the reform of the Green Deal Framework will unlock greater sources of finance for landlords of domestic properties to carry out energy efficiency improvements.

Working with lenders

In the strategy document, the government sets out its intention to work with lenders to incorporate energy efficiency into the terms of their loans. To some extent, lenders are already doing this.‎

The Call for Evidence on the reform of the Green Deal Framework sets out the government's desire to hear from banks and finance providers on the proposals set out in that document. Suggestions put forward include:

  • Requiring lenders to publish data on the average EPC rating of the properties in respect of which they lend;
  • Asking lenders to look at how mortgage default rates vary with the energy efficiency of properties;
  • Giving better rates to borrowers who carry out energy efficiency works;
  • Setting a voluntary target for lenders to improve the EPC rating of the properties on which they lend.

If such measures were adopted, it could make it very difficult to obtain finance for properties with poor EPC ratings, unless borrowers committed to carry out energy efficiency works. This would, therefore, lead to an improvement in the energy efficiency of properties. This is likely to be a greater boost to energy improvement than the MEES Regulations.

Non-financial obstacles to the installation of energy improvement measures

The government acknowledges that it is not just access to finance that can hamper the installation of energy improvement measures. Currently, energy efficiency is not perceived as adding value. Obviously, if lenders start to require works as a condition of a loan, or give preferential interest rates to borrowers who carry out energy efficiency works, this will change. However, the government also wants to raise awareness of energy efficiency products and technologies. It is suggested that this could be done by improving the data that is available.

The government is also making funding available for innovative energy efficiency products and services.

Will EPCs need to be provided more frequently?

The government will be launching a Call for Evidence on the possibility of extending the requirement to provide an EPC to other trigger points. Currently a valid EPC must be provided on a sale or letting. There is no indication, as yet, which other transactions may be considered appropriate for the provision of an EPC. However, it is possible, that the grant of a mortgage may be included.

The government may also clarify the position on whether an EPC is required on a lease renewal. Current guidance states that an EPC does not have to be provided on a lease renewal. However, this does not fit with the drafting of the MEES Regulations, which specifically include lease renewals as tenancies that cannot be granted on or after 1 April 2018 if the property has an EPC rating of below E, unless an exemption applies and has been validly registered. As landlords do not generally provide EPCs on lease renewals, it is possible that the EPC rating would not be known, unless an EPC was obtained prior to the grant of the renewal lease. Clarity on this issue would be welcome.

Next steps

Responses to the Call for Evidence on the reform of the Green Deal Framework must be submitted by 23 November 2017. Following this, a consultation will be issued. Responses to the Call for Evidence on Building a Market for Energy Efficiency must be submitted by 9 January 2018. The response will then be published in 2018 and will lay out a programme of work for the coming years.

We are set to see further change in the run up to, and beyond, 1 April 2018 deadline. We will continue to monitor and keep you informed of further developments.

Contributor: Alexandra Holsgrove Jones

 This publication is intended for general guidance and represents our understanding of the relevant law and practice as at October 2017. Specific advice should be sought for specific cases. For more information see our terms & conditions.

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