Just before Christmas, the government issued a consultation document seeking views on a proposal to amend the Minimum Energy Efficiency Standard (MEES) regulations. The proposal is that landlords of so-called “sub-standard” residential properties should contribute towards the cost of improving their energy efficiency, with the amount of the contribution being capped at £2,500 per property.
Current requirements
The current MEES requirements for residential properties were described in an article by Kate Symons – Important distinctions (2 December 2017, p72). They differ from those relating to commercial properties in several aspects.
In particular, the “seven-year payback rule” applies only to commercial properties. Broadly, a landlord of a residential property that is “sub-standard” – that is, with an EPC rating of F or G – will not be permitted to let the property from 1 April 2018 (or, from 1 April 2020, continue to let it) unless it can show that it has carried out all “relevant” energy efficiency improvement works to improve the EPC to an E rating or above, or that an appropriate exemption applies. The key issue, therefore, is to identify the meaning of “relevant” works in this context.
For the purpose of residential properties, energy efficiency improvement works are currently deemed to be relevant works only if funding is available to cover the full cost of purchasing and installing such improvements at no cost to the landlord. This may be achieved by way of one or more of a Green Deal finance plan, the Energy Company Obligation (ECO) or a local authority grant.
Where the landlord is not able to obtain “no cost” funding, it can register an exemption on the exemptions register. There is no registration fee, but the landlord will still incur time and resources researching whether “no cost” funding is available.
The rise and fall of the Green Deal
The government assumed that most residential landlords would obtain their funding for improvement works from the Green Deal. This is an innovative funding solution under which a landlord borrows money to undertake specified energy efficiency improvement works. Repayments of the loan are added to the occupier’s energy bill, on a “pay as you save” basis, and then passed on to the lender. The repayments are secured by a Green Deal charge that attaches to the property, and becomes the responsibility of future occupiers. They are responsible for the Green Deal plan repayments, and will continue to benefit from the energy efficiency improvements.
The amount that can be financed by a Green Deal plan is limited by the so-called “golden rule”. This provides that the first year’s repayments must not exceed the estimated energy saving in the first year, and the overall repayment period must not exceed the lifetime of the measures installed.
All in all, this was an ingenious scheme, but there were fewer applications than expected and it was expensive to operate. As a result, the Treasury refused to provide funding for the Green Deal after August 2015, which effectively meant that no further Green Deal plans became available (although existing loans still have to be repaid). At a stroke, the entire basis of MEES for residential properties was undermined.
Since then, there has been a partial re-launch of the Green Deal. However, there will not be sufficient providers to match the number of let residential properties that need improvement. Similarly, ECO funding is guaranteed only to 2022, and is limited in amount. Therefore if MEES is to be successful for residential property, a new approach is needed.
The government’s suggested new approach
As the consultation document explains in the executive summary, if nothing is done, it is “highly likely that many landlords of F- and G-rated rental homes will be unable to deliver improvements in line with the current regulatory requirements. This would be to the continued detriment of their tenants and would mean that the [MEES] regulations would fail to achieve the wider benefits [for which they were made].”
The key proposed amendment is the removal of the “no cost to the landlord” principle. However, the government’s proposal is not intended to require landlords to meet the full cost of any energy efficiency improvement works. Instead, a cap of £2,500 per property is being proposed. In other words, a landlord needs to ascertain what works are required (as stated in the EPC recommendations report) and investigate whether “no cost” funding is available. If it is, this should be used. If it is not, then the landlord must carry out sufficient works to reach an E rating, using his own funds, up to a maximum of £2,500 per property (inclusive of the amount of any third-party funding that is available).
A landlord who spends the full £2,500 on a property but is unable to bring the rating up to E would be entitled to register an exemption, which would last for five years.
The government estimates that such an approach should enable approximately 30% of properties currently rated F or G to be improved to E, which equates to approximately 85,000 properties. It also says that the average cost of works to bring a property up to an E rating is £865.
The proposal is that these changes should take effect on 1 April 2019, and at that time any existing exemptions registered by landlords based on the “no cost to the landlord” principle would cease to be valid. In readiness for that date, landlords would at that point need to reassess their properties and potentially spend their own money to improve them.
The consultation closes on 13 March 2018. We encourage landlords to respond to it. The proposals totally change the basis of how the MEES regulations apply to residential property, so the importance of this consultation cannot be overstated.
The consultation is available at: https://www.gov.uk/government/consultations/domestic-private-rented-sector-minimum-level-of-energy-efficiency
Peter Williams is a professional support lawyer in the real estate group at Shoosmiths LLP and Kate Symons is a senior associate at Boodle Hatfield LLP
