Minimum Energy Efficiency Standards are coming into force on 1 April 2018. With this deadline fast approaching here is a reminder of the issues from a lender's perspective.

The Regulations

The Energy Efficiency (Private Rented Property)(England and Wales) Regulations 2015 provide that from 1 April 2018 it will be unlawful to grant a new tenancy of a property with an EPC rating which is lower than E (known as a sub-standard property). While there are exemptions, landlords can only take advantage of an exemption if it has been validly registered on the PRS Exemptions Register.

From 1 April 2020 it will be unlawful to continue to let a sub-standard domestic property (including buy-to-let), with the same prohibition applying from 1 April 2023 to sub-standard non-domestic properties.

There are a number of factors for lenders to consider. While lenders will not want to make their products uncompetitive they do need to assess the risks involved of lending to customers who purchase property under a buy to let product where that property has an EPC rating of below E.

Lending considerations

Is the EPC rating of a property currently a consideration in deciding whether to lend? If not, should it be?

What is the potential impact of lending on buy to let property without a consideration of the EPC rating? Considerations should include –

  • the potential impact on the value of property bought for investment purposes if it cannot be used to grant a new tenancy on or after 1 April 2018, and will need upgrading prior to 1 April 2020.
  • will lending without checking the EPC rating encourage applications from customers purchasing sub-standard properties? Much may depend upon the attitude of other lenders as well but an exposure to energy deficient properties in the portfolio may weaken its quality.
  • it may be difficult to let a sub-standard property in future and therefore a borrower's income stream and ability to make repayments could be affected. Clearly too many loans of this nature in a portfolio could increase default rates

How will lenders identify the EPC rating?

  • Is it included as part of the valuation process? If not, should it be?
  • This issue is not currently covered by the CML Handbook so it is not checked by solicitors? Do changes need to be made to instructions?
  • Where the new lending transaction is a refinance, there is no requirement for an EPC to be provided. If a lender is to insist upon it, it will add additional cost. Will this make products uncompetitive? Lenders will need to balance the need to know an EPC rating of a property against the business impact.

Where a rating of below E is identified, should the customer be required to carry out the work prior to completion or is it acceptable for it to be completed pursuant to an undertaking?

Recoveries

  • It is not clear whether receivers will be at risk of enforcement action if sub-standard property continues to be let after April 2020. They are more likely to be at risk if they were to grant a tenancy of a sub-standard property.
  • Some receivers will take a conservative approach and may be unwilling to take appointments over tenanted sub-standard properties. This may be more common where the receiver is acting as principal.
  • In future sub-standard properties may be more difficult to sell or their value may be adversely affected.

Penalties

The enforcement regime provides for landlords to be fined and publicly named. We do not believe that lenders will be liable to any penalties unless they have gone into possession and granted a tenancy of a sub-standard property themselves.

Further Information

Visit the MEES hub on our website for further information and a quiz on how any specific property is going to be affected.