From 1 April, it will be unlawful to grant a new tenancy of a property with an EPC rating of below E (known as a sub-standard property) unless an exemption applies and has been validly registered.
How will this change affect BTL landlords and their lenders?
What is happening on 1 April 2018?
Under The Energy Efficiency (Private Rented Property)(England and Wales) Regulations 2015 (known as the MEES Regulations), from 1 April 2018 it will be unlawful for a landlord to grant a new tenancy of a sub-standard property unless an exemption has been registered. This prohibition is extended on 1 April 2020 (for domestic properties), from which date it will be unlawful to continue to let a sub-standard property unless an exemption has been registered.
Why might lenders treat BTL properties differently?
Lenders may be unwilling to provide finance for the purchase of a sub-standard BTL property, or may require that works be done to improve the property as a condition of the loan.
Some lenders may treat properties that are to be occupied by the customer in the same way, as a poor EPC rating will affect value. However, it is likely that BTL properties will be looked at more closely. This is because if the property is sub-standard, the customer will only be able to grant a new tenancy on or after 1 April 2018 if it has registered an exemption on the PRS Exemptions Register. If it has not done this, it will be in breach of the MEES Regulations and could be liable to a fine of up to £4,000 for a breach of three months or more. In addition, the landlord customer could be "named and shamed".
Some lenders may take the view that they are not interested in whether or not an exemption applies; they may simply want BTL properties to be up to an E rating before they will provide finance.
What about tenancies granted prior to 1 April 2018?
If a tenancy of a sub-standard property is in place on 1 April 2020 (and there is a valid EPC on that date), the customer will be in breach of the MEES Regulations if it has not registered an exemption. Landlords of sub-standard properties will, therefore, need to ensure that, where an exemption applies, it is registered before 1 April 2020.
Some existing lettings may fall within the scope of the MEES Regulations prior to 1 April 2020. This is because, on the expiry of a fixed term assured shorthold tenancy (AST), it becomes what is known as a statutory periodic tenancy. Although no new formal tenancy agreement is entered into, the case of Spencer v Taylor (in 2013) held that a "new" tenancy is created when the fixed term comes to an end. The MEES Regulations allow a six month exemption in cases where there is a “deemed creation of a new lease by operation of law” so a landlord will have six months to either show that the property has a rating of E or above, or register another exemption (which will typically last for five years).
What should lenders be considering?
- What is the potential impact on the value of the BTL property if a lease cannot be granted on or after 1 April 2018?
- Where a lease is already in place, what is the impact on value of the property needing upgrading before 1 April 2020?
What exemptions are available?
- If a landlord has carried out all relevant energy efficiency improvements (or there are none that could be made to the property) and the EPC rating is still below E, the landlord can let the property. For domestic properties, to fit within the definition of relevant energy efficiency improvements the works must be capable of being wholly financed at no cost to the landlord. However, this is set to change and landlords of domestic properties could find themselves having to pay up to £2,500 per property in an attempt to improve energy efficiency.
- The consent exemption may apply if third party consent is required for the works, and cannot be obtained.
- The devaluation exemption could apply if the works would result in a reduction of more than 5% in the market value of the property, or the property of which it forms part.
- There are various temporary exemptions available, which last for six months and are, in effect, a grace period to enable the landlord to either bring the property up to an E standard or register a longer term exemption.
Over the coming weeks, we will be sending out legal insights, containing more information about the exemptions.
However, even if the customer can rely on an exemption, it may be difficult for it to let a sub-standard property in the future. This will affect the customer's income stream and its ability to make repayments.