Property: Waving a green stick

In 2015, the UK government is planning to introduce regulations to compel landlords to make energy efficiency improvements to private rental properties that need it. Once implemented, if a private rental property doesn’t meet a minimum Energy Performance Certificate (EPC) threshold, that landlord won’t be able to rent out the property. Those assets would, in effect, cease to be income-producing until remedial measures are adopted.

This proposed regulatory regime is a profound change in government approach. Government policy has previously focused on grants and financial support for energy-saving improvements, as well as other initiatives to promote take-up in renewable energy generation. This latest proposal is less carrot and more stick, aimed squarely at underperforming properties and their private landlords.
Which rental properties are to be affected? There are separate consultations for both domestic and non-domestic properties but the unifying factor is the private rental sector. Classes of buildings outside the EPC regime include listed buildings, temporary or seasonal buildings and small properties of less than 50m2.

A threshold issue is what performance bar has been set. The proposal is to set a minimum energy efficiency standard of private rental properties at an EPC rating of E. Domestic and non-domestic private rental properties with EPC ratings of F or G will therefore not comply and will therefore not be lettable, unless an exception or exclusion applies.

In addition to the minimum standards, tenants of domestic rental properties may request other energy efficiency measures, provided hurdles are cleared in relation to identifying recommended improvements and obtaining appropriate funding.

Looking at exceptions to the regime, one is where third party consent is required but is not given. This may be from a freeholder, an occupational tenant, a local authority if planning permission is required or even a mortgagee. A more complex issue relates to the mismatch between capital costs of energy efficiency measures and who benefits from the energy savings, typically the user. A landlord may seek Green Deal finance for those improvements, with that funding to be recouped via utility bills. Repayments of that funding should not exceed expected savings - called the Golden Rule - but the payer of the utility bills will need to be creditworthy and may scupper finance if they are not. A general principle for consultation is that where funding is not available, it would be unfair to still penalise a landlord for not making the improvements, provided that is adequately evidenced.

This proposal is aimed squarely at underperforming properties and their private landlords

Taking a step back, let’s recognise the scale of what is being proposed. According to government data, nearly one-fifth of non-domestic properties have the lowest EPC ratings of either F or G. On the domestic rental side, there are over 4 million such properties in the UK. Of that, one in 10 have EPC ratings of F or G. By sheer weight of numbers, the proposed regime is likely to have a significant impact on national energy performance once implemented - and at substantial capital costs.

It is noticeable that this regime is to apply solely to the private rental sector. Does that mean that the government is satisfied with its own energy-saving efforts across the publicly owned portfolio? The government does have its own requirements, under the EU Energy Efficiency Directive. That directive requires governments to implement a range of measures to improve energy efficiency. While there are different legislative regimes between public and private property, analysis would be helpful to see that capital cost burdens are being equitably shared across each sector.

Finally, let’s look at timing. While 2015 is targeted as the date to introduce the regulations, there is an April 2018 date for implementation. Whether that relates to new tenancies or all tenancies is up for discussion. There is proposed to be an April 2023 backstop provision which is intended to sweep up all properties where private landlords had validly been excused from earlier implementation.
For individual landlords, many will have made historic property investment decisions without reference to energy performance. That is to change, while the programme for implementation is intended to ease that burden. The regulations are also likely to have different impact locally and regionally, as it will inherently favour new (and efficient) over old (and inefficient) buildings. It may even exacerbate housing shortages if improvements are not implemented and domestic rental properties are no longer available for that purpose. For all these reasons, expect to hear more about the consultation and its outcomes.

Matthew Jones is a partner at Taylor Wessing’s construction and engineering team