How are energy efficiency standards changing for buy to let property, and how can landlords avoid fines and financing issues in the future? Consultant Broker, James Powell, explains.
What are the Minimum Energy Efficiency Standards for private rental property?
Current energy efficiency standards state that all residential buy to let properties require an Energy Performance Certificate (EPC) of ‘E’. The legislation, introduced in 2018, applies to all assured tenancy, regulated tenancy and domestic agricultural tenancy agreements.
Unless you have a valid exemption (more on this shortly), you cannot legally rent out a property with an energy efficiency rating of ‘F’ or ‘G’. Furthermore, buy to let mortgage lenders will not accept purchase or remortgage applications where a property does not meet the legally required EPC standards.
However, while housing energy efficiency has been trending in the right direction since the 90s, and the number of properties in the private rental sector (PRS) with an EPC rating of ‘C’ has increased fivefold in the last 12 years (largely due to higher standard requirements of new build properties), the UK is not on track to meet our ambitious, but necessary, climate targets. Therefore, minimum standards are due to increase very soon.
When will EPC rules change for buy to let property?
As of 2025, all buy to let property starting a new tenancy will require an EPC rating of ‘C’. Existing tenancies have until 2028. Furthermore, there are strong recommendations that all residential properties have an EPC rating of ‘C’ or higher by 2028, so it’s not just a landlord problem! This means that the majority of UK homes (some 19 million) require remedial energy efficiency work within the next seven years.
Buy to Let Property Energy Efficiency Exemptions
Under the current regulations, landlords are not required to spend more than £3,500 (including VAT) on efficiency improvements to bring properties up to an EPC rating of ‘E’. Landlords are encouraged to make all the relevant improvements they can up to that amount to be able to register for an ‘all improvements made’ exemption.
There are five main exemptions landlords can apply for, these include:
High cost: applicable when even the cheapest recommended improvements exceed £3,500
All relevant energy efficiency improvements made: applicable when improvements (up to the cost of £3,500) have been made, but the EPC remains under a rating of ‘E’
Wall insulation exemption: applicable when the only recommended improvements are cavity wall, external or internal wall insulation and written evidence from a relevant expert shows that these energy efficiency measures would negatively alter the fabric or structure of your property
Third-party consent: applicable when recommended improvements require approval from another party. For example, the tenant, freeholder, planning department, superior landlord or mortgage holder. If, despite substantial efforts, you cannot get consent for the measures, you can apply for this exemption
Property devaluation: applicable when a Royal Institute of Chartered Surveyors (RICS) registered independent surveyor has inspected the property and can evidence that making energy-efficient improvements would devalue the property by more than 5%
Exemptions are generally valid for five years and must be registered on the PRS Exemptions Register.
Minimum Energy Efficiency Standards Penalties
As of May 2021, local authorities in England and Wales can apply for funding from the Department for Business, Energy and Industrial Strategy (BEIS) to support MEES enforcement. Under these regulations, they can serve landlords with a compliance notice and issue you a fine of up to £5,000 per property.
Buy to Let Energy Efficiency Targets Beyond 2028
There’s no denying that climate change is having a catastrophic effect on our weather and environment. The UK has a target to be net-zero on carbon emissions by 2050, which the National Housing Federation has welcomed. Consequently, we will likely see increasingly stringent legislative requirements to move every faction of society in the same direction to achieve this ambitious but necessary target.
The housing sector has a significant role to play in this; buildings are the second-largest source of greenhouse gas emissions in the UK, and the built-up environment contributes about 40% of the UK’s total carbon footprint. Newly constructed buildings are much more energy-efficient, as you would expect, but it’s estimated that by 2050, 80% of the buildings standing then have been built before 2022. Therefore, we can’t build our way out of the crisis and construct a new set of buildings; we will need to decarbonise the existing building stock we have.
The overall cost of bringing UK housing stock up to a minimum EPC rating of ‘C’ is estimated at £304 billion. Major companies are calling for a properly regulated national retrofit strategy to assist property owners in making the necessary changes in order to meet the Government’s 2050 emissions targets. We can only hope that a new and improved scheme, similar to the short-lived Green Homes Grant, is launched in 2022 to alleviate some of the financial pressure.
Looking more specifically at the future of PRS property, it’s likely legislation will change again. Proposals are already under debate to increase the maximum fine per property from £5,000 to £30,000. The same proposal calls for increasing the cost cap, which landlords must pay towards the property before registering an ‘all improvements made’ exception from £3,500 to £10,000, with some thoughts to make it an index-linked figure.
What Can Buy to Let Landlords Do?
Having set out the scale of the challenge facing the sector, let’s review how we can help you respond proactively.
If you are lucky enough to not own a single property with a below C grade EPC rating, or your properties are listed and have resilient exceptions that will stand the increased scrutiny and remain renewable, then it may not apply to you!
The reality is that most property investors and homeowners reading this will need to take at least some action, and no doubt have already thought of a few concerns so far while reading, so the question will be, what is to be done?
First, for a quick check of a current EPC rating, you can use our online EPC checker. For a more detailed report into a property and the recommended energy efficiency improvements required to increase the EPC rating, you can use the .Gov site here. This will give you estimated costs of recommended works and potential returns on your energy bills. We recommend scrutinising your report carefully as an EPC assessor may make some reasonable assumptions in producing the certificate for the property, which could be incorrect, and if so, this may affect your available improvement options or the rating itself. For example, looking at my flat, which is in a listed building, one of the recommendations of my EPC report is that we replace the windows with double glazing. However, the sash windows are a period feature of the property that we cannot replace because it is a listed building! Conversely, if the valuer assumes a hard floor with no insulation, but you do have underfloor insulation, then you could challenge your current EPC and improve it. Additionally, you may need to update the report to reflect any improvements since the last survey, such as replacing lighting with energy-efficient bulbs. So it’s very much worth checking the report thoroughly.
Ultimately, it should give you a clear picture and a plan for each property of the challenges and what you need to do in each case. If your property does not have a current EPC, based on when it was last sold or marketed for rent, then you can commission one. This is relatively inexpensive (between £35-£120 depending on the property) and will give an accurate energy assessment, essential for improvement planning.
Once you have a plan for each property, we need to get strategic and look at how to fund energy improvements.
Funding Energy Efficient Improvements for Buy to Let Properties
Until we have a replacement for the Green Home Grant scheme, limited resources are offering financial assistance. However, as mortgage brokers, we can help you find and release funds needed from your existing portfolio.
Capital raising can be secured for property improvements with relative ease (depending on available equity). Not only are you improving the lender’s security, but it’s also increasingly likely future mortgage terms will depend on a minimum EPC rating of ‘C’. Hence, improvements are in both parties interests. Even if you are currently locked into fixes, there may be options for further advances or second charge funders. We can even analyse whether it’s worth breaking a current fixed rate to release capital.
Realistically, as most landlords are in two or five year fixed buy to let mortgages, you’ll probably only have one chance before 2025/2028 to refinance at the end of a fixed term. After this point, if your properties are still not a minimum EPC rating of ‘C’, you’re in danger of encountering issues when coming to remortgage. Lenders will not offer further lending against a property that cannot legally be let (unless you have necessary exemptions).
There is also speculation that properties below an EPC rating of ‘C’ will not see the same value increases as those in the ‘A’-‘C’ bracket. Therefore, as well as securing the long-term future of many properties, this could be a valuable investment in their future value and an opportunity as much as a threat. It may also help you secure better rates on your mortgages, with key high street lenders such as NatWest and specialists like Keystone Property Finance already offering compelling ‘green’ mortgages, only available to C+ grade mortgages. We expect this trend to continue, offering increasingly better value to compliant properties.
The critical thing is to engage with the problem now, before it becomes a crisis. Accurately build a picture of what needs doing and then create and execute a plan to overcome these challenges. I can help at any stage of the process, from the initial review to working out the best-combined package of grants and lending to just securing the best value funding for energy efficiency. You can contact me on 01732 471651 or email firstname.lastname@example.org.
25th August 2021