Getting your house in order
Mark Banham from our commercial property team explains the new regulations relating to Minimum Energy Efficiency Standards in the Private Rented Sector.
What are they?
The Energy Act 2011 requires that a property rented out in the private sector will have to meet minimum energy efficiency standards, achieving at least a rating of E on its Energy Performance Certificate (EPC). It is important that landlords are aware of the changes so they do not get stung when the new regulations come into force.
Primarily the regulations will affect assured tenancies including assured shorthold tenancies (ASTs) and regulated tenancies under the Rent Act 1977.
The regulations will catch a wide range of domestic properties although there will be a number of exemptions (for example, holiday lets and lodgers). It is important that landlords make sure that they are aware of which properties in their portfolio are affected by the regulations.
When will the regulations come into force?
From 1 April 2018, the regulations will apply to the granting of any new tenancy whether to a new tenant or to an existing tenant (i.e. any extension or renewal of an existing tenancy).
Crucially, the regulations will also apply to a statutory periodic tenancy which comes into existence at the end of the fixed term of an AST. Therefore, whenever a tenancy, even one entered into before 1 April 2018, expires after that date and the tenant “holds over”, the property will be legally required to have a minimum EPC rating of E, even if it was rated F or G at the beginning of the tenancy.
By 1 April 2020, the regulations will apply to all existing tenancies.
How will the regulations work?
A property will be regarded as sub-standard if its EPC rating is F or G and if the property is let in these circumstances, the landlord will be liable for financial penalties which will be imposed by the local authority.
Energy efficiency improvements must, therefore, be carried out to bring the property up to an E rating at the minimum (unless an exemption applies).
Although a breach of the regulations may result in sanctions, the breach does not invalidate the tenancy itself. Rent is still payable, although tenants may try to stop payments once they know that the landlord is in breach.
Local authorities will be responsible for enforcing the regulations.
As mentioned, there are exemptions that apply to certain properties and certain improvements. It is important that landlords check whether these apply to them as they will only be able to rely on an exemption to escape sanction where they have provided evidence. Properties which are subject to an exemption will need to be registered on the central “PRS Exemption Register”.
If a landlord is suspected to be letting a property that is non-compliant, or has not sufficiently proved an exemption, the local authority may serve a compliance notice requesting further information. Failure to provide such information may result in the local authority issuing a penalty notice against the landlord.
There are fixed penalties for failing to comply with a notice and letting a non-compliant property. Landlords could face cumulative penalties for each transgression, up to a maximum of £5,000. If a landlord re-lets the non-compliant property to a new tenant, further penalties may be awarded by the local authority.
A significant number of privately-rented homes in England and Wales fall into the EPC bands of F and G. On the face of it, requiring landlords of these properties to improve the energy efficiency will lower energy bills for tenants and cut carbon emissions to benefit the environment. Improving the energy efficiency of a domestic home from F and G to E is relatively easy in comparison with improving the energy efficiency of, say, a B-rated home to an A-rated home. It may be the case that simply improving insulation and upgrading a boiler will be sufficient to improve the rating of a non-compliant building to band E in most cases.
The crunch is that, previously, landlords would have been able to apply for “green deal” finance for such improvement works. The government however, has pulled funding for the Green Deal Finance Company that lent money to qualifying landlords. This means that if landlords of non-compliant properties want to continue to rent out their properties, they will have to foot the bill for the improvements. As a result, the new regulations have been painted by many as further evidence that the government is using buy-to-let landlords as a “cash cow”. Others have inferred that, rather than saving tenants money, this “green tax” will cause landlords to increase their rents in order to offset their expenditure on improvements.
Although the implementation of the regulations is still some way in the future, landlords should start taking steps to minimise the risk of falling foul of them. We suggest that a review of the energy efficiency ratings of landlords’ portfolios should be started and that any properties that have an energy efficiency rating of F and G should be subject to a planned improvement programme in order to ensure that the necessary works have been carried out by 1 April 2018 at times that are convenient to the landlord and the tenant. There is no exemption in the Act to take account of the difficulties of getting work done around a potentially uncooperative tenant, and landlords will not want to have to incur the cost of litigation to force a tenant to allow workmen in, or even to evict a tenant to do so.