We previously blogged about the Government’s public consultation on proposals to amend the Energy Efficiency (Private Rented Property) (England and Wales) Regulations 2015 (the “MEES Regulations“).

Following the consultation, the Government has published its final policy decisions and the MEES Regulations have been amended by the Energy Efficiency (Private Rented Property) (England and Wales) (Amendment) Regulations 2019.

Will this affect me?

The amended MEES Regulations mean that a residential landlord cannot let a sub-standard residential property to a new tenant, or renew or extend an existing tenancy agreement with an existing tenant, unless it has either:

1. made all the relevant energy efficiency improvements that can be made to the property (or there are none that can be made) and the property’s energy performance indicator is still below an EPC E, and it has registered this exemption; or

2. no improvements have been made but a valid exemption applies which has been registered.

From 1 April 2020, residential landlords must not continue to let sub-standard domestic property, even to existing tenants, unless they can rely on either of the above.

So what exactly has changed?

There are six key changes to the MEES Regulations that will take effect from 1 April 2019:

1. Removing the “at no cost to the landlord” principle

The original MEES Regulations allowed residential landlords to register an exemption on the PRS Exemptions Register (the “Register“) where they were unable to make improvements to sub-standard premises with EPC ratings of F or G “at no cost” to themselves. Once registered, these exemptions were valid for five years.

However, as expected, the “at no cost to the landlord” principle is no longer available and residential landlords will be expected to pay towards the improvement of their sub-standard F and G-rated properties.

All existing exemptions obtained under the “at no cost to the landlord” principle will cease to have effect on 1 April 2020, and the Register will be updated so all such exemptions are automatically cancelled on 31 March 2020. Following this date residential landlords will be expected to do the necessary improvement works (up to the value of the cap discussed below) unless they can rely on another valid exemption.

2. Introducing a landlord financial contribution amendment capped at £3,500

Residential landlords will have to contribute up to £3,500 per property to improve sub-standard premises where third party funding is unavailable or insufficient to cover the improvements. This could be through self-funding, or through loans or other finance.

Whilst the Government has always believed any landlord contributions should be subject to a cap, the level of the cap has increased from the initial proposal of £2,500 to £3,500. However, Government analysis indicates that the average cost of improving a residential property with an EPC rating of F or G to band E is only £1,200. Crucially, the costs cap is not a spending requirement – if a residential landlord can improve its property to at least an E for less than £3,500, it will have met its obligations.

The cap includes VAT – notably, under the non-domestic regulations, improvement measures are costed exclusive of VAT but landlords of non-domestic properties can usually reclaim their VAT from HMRC, unlike typical domestic sector landlords.

3. Improvement costs incurred on or after 1 October 2017 can be included within the £3,500 cap

A landlord of an F or G-rated residential property who has made energy efficiency improvements to it on or after 1 October 2017 can count the costs of those improvements towards the cap for that property, including where funding was obtained through a third party. The landlord can subtract the cost of these previous energy efficiency improvements from the £3,500 cap to determine the value of the remaining energy efficiency improvements it must make.

Any costs incurred before 1 October 2017, however, cannot be counted towards the cap.

4. Available third-party funding can be counted within the £3,500 cap

This costs cap will apply to the overall cost of improving a residential property, rather than the cost of individual measures. This means a residential landlord need only invest a total sum up to the cap in improving the property, rather than investing multiple sums which are each individually subject to the cap.

Green Deal finance and other available third-party funding can be included within the £3,500 cap. Where partial funding is available, landlords will only be obliged to contribute the shortfall.

5. A new “high cost” exemption

There will be a new “high cost” exemption available where a sub-standard residential property cannot be improved to an EPC rating of E for £3,500 or less.

Residential landlords will need to install all measures which can be installed up to the cap, and then register an exemption on the basis that “all relevant improvements have been installed and the property remains below E”.

If a landlord intends to rely on this, it will need to upload to the Register copies of three quotations from different installers. Each of these quotes must show that the cost of the cheapest recommended improvement (inclusive of VAT) exceeds £3,500 in order for the exemption to be effective. The landlord will also need to submit confirmation that it is satisfied the measures exceed the cost cap. This means that, if a landlord receives a quote for less than £3,500 from an installer that it does not wish to use, it may have no option (if all the other quotes are for more than £3,500) but to use that installer or to pay more than the cap to use an alternative.

Once registered, a high cost exemption will be valid for five years. The landlord must then make efforts to improve its property to meet the minimum energy efficiency standard.

6. Removal of the “tenant confirmation” consent exemption

Prior to 1 April 2019, a landlord could register a consent exemption if they planned to use Green Deal funding and its tenant refused to confirm that the landlord may enter the Green Deal financing agreement.

Now, where a residential landlord has secured Green Deal finance but a residential tenant withholds its consent, the landlord will be unable to rely on this as the basis for an exemption and will have to seek alternative funding – or contribute out of its own pocket subject to the cap.

An important distinction is that Landlords of non-domestic properties will still be able to rely on the “tenant confirmation” exemption.