Residential lettings: Landlords to fund MEES measures
Earlier in the Spring the Department for Business, Energy & Industrial Strategy (“BEIS”) launched a consultation on proposals to amend the minimum energy efficiency standards ("MEES") within the Energy Efficiency (Private Rented Property) (England and Wales) Regulations 2015, which came into force 1 April 2018.
The principle effect of the MEES, announced in March 2017, is to impose a minimum standard of energy efficiency for privately rented properties; Energy Performance Certificates (EPC) Standard E will become the lowest acceptable standard and properties holding sub-standard F and G will be required to be upgraded.
Once this section of the regulations comes into force, landlords of non-domestic and domestic buildings with an energy efficiency rating of less than the minimum standard of E, which fall within the scope of the regulations, will be restricted:
- from 1st April 2018 from renewing existing tenancies or granting new tenancies;
- from 1st April 2020 from continuing to let existing domestic properties; and
- From 1st April 2023 from continuing to let existing non-domestic properties
The regulations currently require landlords of properties falling below the minimum standard to take the necessary steps to improve the energy efficiency of their properties on the first occasion that the property is re-let after April 2018, provided that improvements can be made at 'no cost to the landlord'. It was anticipated that funding under Green Deal finance or from Local Authorities would be available, failing which landlords were not required to make the improvements, but instead could register an exemption.
Consultation on new proposals
Three years on from the drafting of the 2015 regulations Green Deal finance is now largely unavailable and other third party funding has failed to make up the shortfall. Just weeks before the MEES restrictions were due to come into force, the Government launched a consultation on proposals to amend the MEES regulations in relation to domestic properties.
BEIS proposed in the consultation to require landlords, within certain parameters, to fund the works themselves. The consultation proposed the removal of the 'no cost to the landlord' principle and the introduction of 'landlord funding contribution', for situations in which a landlord is unable to obtain suitable 'no cost' funding or subsidy. As part of its proposal, BEIS intends to introduce a cost cap of £2,500 per property on the amount any landlord would need to invest in an individual property to "protect landlords from excessive costs".
The Government's objective for this proposal is set out in the Executive Summary to its consultation paper as follows:
"The objective of these proposals is to ensure that the domestic minimum regulations deliver the range of benefits originally envisaged from them. These benefits include lower energy bills for private rented households, improved health outcomes as a result of warmer homes, and lower overall energy demand.”
The consultation has now closed and we await the Government response.
The impact of this proposal
This proposal undoubtedly has significant ramifications for landlords, in the rural sector, in which dwellings are likely to be older, with lower EPC ratings than properties in more urban areas, built to modern building regulations. Landlords with a substantial number of farm cottages housing farm workers or landed estates with a large portfolio of tenants may face a significant bill for carrying out any remedial action required.
There may also be interesting consequences for the residential lettings market arising from these proposals as it is likely that landlords will be left with insufficient time fully to consider the proposals. They may have to take potential lettings off the rural rental market, whilst they undertake (or gather funds to finance and then undertake) the necessary works to the dwellings.
A further problem some landlords will face is that the proposals give no regard to any investment made to properties prior to 1 October 2017; it is only expenditure made after that date which will count towards the cap.
The only saving grace for landlords is the fact that there is a cap in place on the level of contribution needed and that any subsidy obtained by the landlord will count towards the cap limit. With the cap set at £2,500 however, one wonders how far these funds will stretch in improving some historic rural dwellings, which may require a very substantial upgrade.