How to meet new landlord standards on energy efficiency

Incoming changes to the legislation around Energy Performace Certificates and the work that is required to improve properties before April 2018 is another very good reason why a Landlord should work closely with a professional managing agent like Mather Marshall. We keep our clients updated with relevant legislation changes, their property safe and keep tenants happy.

Our Property Managers have been working hard to bring the properties in our portfolio up to the required standard, however, many Landlords may still be unaware of what’s required if you do not use a professionally managed service.  If you have any questions about the changes or would like to know whether any work is necessary, our Property Managers are on hand to help.

To find out more about our Property Management services click here

Overview

As from the 1st April 2018 there will be a requirement for any properties rented out in the private rented sector to normally have a minimum energy performance rating of E on an Energy Performance Certificate (EPC). The regulations will come into force for new lets and renewals of tenancies with effect from 1st April 2018 and for all existing tenancies on 1st April 2020. It will be unlawful to rent a property which breaches the requirement for a minimum E rating unless there is an applicable exemption. A civil penalty of up to £4,000 will be imposed for breaches. This guidance summarizes the regulations. There are separate regulations effective from 1st April 2016 under which a tenant can apply for consent to carry out energy efficiency improvements in privately rented properties.

For most landlords, this will mean that they will no longer be able to rent out a property with a rating of F or G after April 1st, 2018. As such landlords with properties in this EPC bracket should begin preparing now for April 1st. However, there are several nuances and exceptions, which this guide covers in detail.

When energy efficiency improvements are compulsory

Where at any time on or after 1st April 2018 a landlord lets a privately rented property which is F or G rated on a current legally required EPC then energy efficiency improvements must be carried out to bring the property up to at least an E rating before the property is rented out, unless the landlord qualifies for an exemption and the exemption is registered on the Public Exemptions Register.

There several ways in which you will be classed as letting a property for these purposes:

• You grant a new assured tenancy, including a shorthold
• You renew or extend an existing assured tenancy, including a shorthold, by agreement with the tenant. This can be done when you grant a fresh tenancy to the same tenant or simply agree with the tenant that the existing tenancy will be extended
• A statutory periodic tenancy comes into existence following the ending of a fixed term assured tenancy (shorthold or non-shorthold). At that point the law imposes a new tenancy on the parties where the tenant stays after the fixed term has run out. This is treated as a new letting for these purposes
• A new assured tenancy by succession comes into existence when a family member takes over a Rent Act protected tenancy
• A new tenancy is granted to a Rent Act protected tenant of the same or a different property owned by the same landlord
• An agricultural occupancy or similar tenancy is granted, renewed or extended

NB: This note does not deal further with tenancies of agricultural dwellings.

In all the above cases the requirement to carry out energy efficiency improvements for non-compliant properties will arise where the property has a valid current EPC (i.e. no more than 10 years old) and the property is legally required to have an EPC because:

• The property which is being let or has in the past been let
• The property has been sold
• The property has been improved and building regulation requirements meant that an EPC is required

The requirement to have an EPC is not just looked at in respect of the property itself which is being let out. It also applies where there has been a requirement for the building, of which the property being let is part, to also have an EPC. This is particularly relevant to non-self-contained units such as bedsits and the position regarding these is explained below under the Section “Flats and bedsits”.

These rules regarding new tenancies are ongoing from 1st April 2018 onwards but, additionally, as from 1st April 2020 they will apply to continuing tenancies which are already in existence on that date. They will then apply on an ongoing basis to continuing tenancies which have a current EPC, if there is a legal requirement for the property to have an EPC.

Continuing tenancies

From 1st April 2020 the Minimum Energy Efficiency requirement will apply to continuing tenancies where there is a valid current EPC for the property, and an EPC is legally required to be in place. The property must , therefore,be brought up to the minimum E rating before 1st April 2020 to comply with the Regulations, unless an exemption is available and is claimed by being registered in the Public Exemptions Register. This applies to the following ongoing tenancies:

• Assured tenancies, including a shorthold
• Ongoing Rent Act protected tenancies. In practice, however, this means that it will only apply where the property which is let (or where it is part of a building) then the building (as a whole) has been legally required to have an EPC which is most likely to occur if it has been sold

Properties within Scope

If a property is legally required to have an EPC then it is potentially within the scope of the Regulations. This means:

• Properties within the scope will include any domestic privately rented property which: has an EPC, and is either (i) required to have an EPC; or (ii) is within a larger unit which itself was required to have an EPC, either at point of sale, or point of let. No changes are made to existing regulations regarding the provision of EPCs. This means that it is the sale or letting of a property which can bring a property within the scope of the Regulations. Similarly, if a bedsit is part of a block that is sold, then the EPC requirement on the sale of the block will bring it within the scope of the regulations
• Flats and houses are subject to the regulations if they are legally required to have an EPC (as a result of being sold or let). In the case of flats this means a self-contained unit. Non-self-contained units such as bedsits do not require an individual EPC but may require one for the whole property
• If a property does not actually have an EPC, then the regulations do not apply

The EPC must be the current EPC if there is one and this must be no more than 10 years old. It follows that if an EPC was obtained when it was required but has run out after 10 years there is no automatic requirement to have another one produced, so that the minimum energy efficiency requirement will not apply at that stage. A further EPC will only be needed the next time that a sale or letting takes place.

If it remains current a new EPC is not required, each time there is a change of tenancy (or a sale) so long as the existing certificate is no more than 10 years old. A further EPC can be commissioned and if this is done then this will become the current one, replacing any earlier certificate. There is no automatic requirement to produce a new EPC after carrying out energy efficiency improvements but this is recommended as the new EPC will then reflect the improvements made. A post installation EPC can likely be the easiest way for landlords to demonstrate that they have complied with the Regulations.

If an EPC has run out without there being a further trigger requiring one, then as the property no longer has a valid EPC (and there remains no requirement to have one) the property will fall outside the scope of the Regulations.

Voluntary EPCs

Where a landlord obtains an EPC, but is not legally required to have one, the landlord will not be required to meet the minimum standard. A voluntary EPC of this type may be registered on the official EPC Data Base but there is no requirement to do so. If a voluntary EPC has been registered in this way it will supersede any earlier EPC that may have existed for the property, but official registration of a voluntary EPC will not require the landlord to comply with the minimum standard.

Examples – EPC Requirements and 10 year validity

Example 1

A landlord intends to let the property on a new tenancy from June 2018. If a property already has an obligatory EPC which is less than 10 years old, then this EPC can be relied upon to let the property. If the EPC is more than 10 years old or if there is no EPC (e.g. because the property has not previously been let) the landlord must obtain an EPC. The Minimum Energy Efficiency Standards will apply where the EPC shows a rating of F or G so works must be carried out up to a minimum E rating unless an exemption applies and is registered.

Example 2

A property is let under a 10 year tenancy with an EPC F rating where the EPC was obtained, as legally required, in 2016. The Regulations here will not take effect until 1st April 2020. On 1st April 2020 as the landlord is continuing to let the property he/she must comply with the Minimum Energy Efficiency requirements. There is a valid EPC which the landlord was required to obtain at the time of the letting. The EPC will continue to be valid until 2026. The landlord must carry out works to bring the property up to a minimum of E by 1st April 2020 or qualify for and register an exemption to continue to let the property legally.

Example 3

The property has been let for 10 years with an F rating. The tenancy started in 2009 when an EPC was obtained as required. On 1st April 2020 the landlord is continuing to let the property. However, in this example the landlord will not be subject to the Minimum Energy Efficiency Standards because the EPC expired in 2019. There is no legal requirement on the landlord to obtain a new EPC at that point because the tenancy is ongoing. The landlord will only be required to obtain a new EPC, which will then trigger an obligation to comply, if they intend to sell or relet the property. This can include a letting to the current tenant or to a new tenant.

Example 4

The situation is the same as in Example 3. However, in 2023 the tenant wishes to sub-let the property. The tenant (who will become the landlord of the sub-tenant) will be required to obtain an EPC at this point. If the new EPC then shows an F or G rating then the Minimum Energy Efficiency requirements must be complied with because the property now has a valid EPC which is legally required.

Flats and bedsits

Flats and houses are subject to the regulations. In the case of flats this means self-contained units and they require their own individual EPC at the point of sale or letting. Non-self-contained units such as bedsits do not require an individual EPC.

If a bedsit is within a property that does have an EPC, then the Regulations will need to be complied with before the bedsit can be rented out if it is F or G rated (or an exemption is registered). Although normally bedsits do not need an EPC, where the house containing the bedsit has been sold the whole property needs to have an EPC. In those cases, the Regulations will apply.

If a flat has its own obligatory EPC as well as the building containing the flat, then it is the EPC for the flat (not the building) which issued to show whether the minimum energy efficiency standard is met.

Buildings excluded from scope of requirements

The following domestic buildings are excluded from the scope of the requirements:

• Buildings and monuments officially protected as part of a designated environment or because of their special architectural historical merit insofar as requirements with certain energy efficiency requirements would unacceptably alter their character or appearance. This includes listed buildings. However, see the next section on Listed Buildings
• Temporary buildings with a planned timed use of 2 years or less
• Residential buildings which are intended to be used less than 4 months of the year
• Stand alone buildings with a total usable floor area of less than 50 square meters

Assured tenancies

In most instances, residential accommodation will be let under an assured shorthold tenancy. This is the main type of assured tenancy in use in the private rented sector. Where an assured tenancy (whether shorthold or not) is granted on or after 1st April 2018, or such a tenancy continues at any time after 1st April 2020, then the minimum E rating is required. If this is not achieved landlords will be prohibited from letting substandard properties (unless an exemption applies). A tenancy is granted when it is entered, i.e. when a binding contract exists between the landlord and the tenant, even though the date on which the tenant is permitted to take up possession of the property is after the date on which the tenancy is entered into.

As from 1st April 2020 the Regulations will apply to ongoing assured tenancies in existence on or after that date, as well, of course, as any new assured tenancies granted after that date.

However, not all residential lettings will be assured tenancies. If a dwelling is let otherwise than under an assured tenancy, whether shorthold or not, it will not be a Domestic PR property so it will be outside the scope of the Regulations altogether, unless it is let under one of the other tenancy types mentioned in the Section “Scope of Regulations”. For these purposes a dwelling is defined by the legislation as a building or part of a building occupied or intended to be occupied as a separate dwelling.

To determine whether the property is a Domestic PR property therefore you need to consider if the requirements for an assured tenancy (including a shorthold) exist. A tenancy can move in and out of assured status depending on whether the required conditions for an assured tenancy are currently met.

An assured tenancy is the letting of a dwelling which is occupied as the tenant’s only or principal home, or by at least one of them if there are joint tenants. The tenant or tenants must be individuals and they must pay more than £250 per annum or less than £100,000 per annum. A dwelling may be a self-contained unit such as a house or flat but for the property to qualify as a dwelling the tenant need only have exclusive occupation of at least one room, such as a bedsit, even though it is non-self-contained and the tenant shares other accommodation with other tenants. Non-self-contained accommodation of this kind however does not require an individual EPC so it will be outside the scope of the Regulations anyway unless it is part of a building which itself has a valid EPC and is required to have one, e.g. because the building itself has been previously sold.

There must be a tenancy; and not a licence. The tenancy/licence distinction is not an easy one and if you are unsure you need to take your own legal advice. Broadly speaking, there will be a licence and not a tenancy where the agreement is with a lodger as where the occupier shares living accommodation with the owner this will be a licence agreement.

If a licence is granted to an employee under a service occupancy where the employee is required to occupy the accommodation for the better performance of his/her duties, e.g. a caretaker, this will not fall within the scope of the non-domestic PR regime either so long as a licence exists as opposed to a tenancy (if there is a letting to an employee however the position may be different and this is an area on which advice will be required as to the specific circumstances applicable).

Improvements which can be required

Improvement work which can be required is any energy efficiency improvement work which qualified for Green Deal and the installation of gas for an off-gas property so long as the mains are within 23 meters from the property. A list of eligible improvements appears below.

So long as the minimum E rating is obtained, it is left to the landlord to choose which works need to be carried out. Obviously there is nothing to stop a higher rating being achieved.

Sub Standard Properties

Properties within the scope of the Regulations which do not meet the minimum E requirement are referred to as sub-standard properties. There is then an obligation on the landlord to bring the property up to the required standard unless an exemption applies and is registered and a prohibition on letting them unless the work is done.

Prohibition on letting

A domestic private rented sector property is substandard if the EPC rating is F or G, unless an exemption applies. The legislation prohibits a landlord from letting out a substandard property. If there is an EPC in place which shows that the property is an F or G, then it must not be let; otherwise the landlord is liable to penalties. This is subject to any available exemptions. Energy efficiency improvements must be carried out to bring the property up to an E rating at the minimum, unless one of the exemptions is applicable. If the work cannot be carried out to meet the Green Deal Golden Rule, then there is potentially an exemption. Under the Golden Rule there should be no upfront costs (or any net cost to the landlord) because savings resulting from the works should repay their cost over the expected lifetime of the works.

If a landlord lets and continues to let the property in breach of the regulations, however, the breach does not affect the validity or legality of the tenancy itself, so the rent continues to be payable.

Exemptions, restrictions on making improvements

Only appropriate, permissible and cost-effective improvements are required under the regulations. Landlords will be eligible for an exemption from reaching the minimum standard where they can provide evidence that one of the following applies:

• They have undertaken those improvements that are cost-effective but remain below an E EPC rating. As currently defined cost-effective measures are those improvements that are capable of being installed within the Green Deal’s Golden Rule. This ensures that landlords will not face upfront or net costs for the improvement works. However, the scope of this exemption is under review and may be replaced by a cost cap. The improvements that must be considered are all the relevant energy efficiency improvements as required for the property contained in the Section “Improvements which can be required” at the end of this Guidance
• Where they are unable to obtain funding via the Energy Company Obligation (ECO), Green Deal Finance or local authority grants. The landlord is required by a contractual or legislative obligation to obtain a third party’s consent or permission to undertake relevant improvements relating to the minimum standard, and such consent was denied, or was provided with unreasonable conditions
• The landlord requires consent, and the occupying tenant withholds that consent. It should be noted that you need to check the tenancy agreement. A tenant’s consent may not be required where the tenancy agreement allows you to enter to carry out improvements (as opposed to just repairs), in which case no consent is needed as you are entitled, as landlord to do the work
• Measures required to improve the property are evidenced by a suitably qualified independent surveyor, for example from the Royal Institution of Chartered Surveyors (RICS), as expected to cause a capital devaluation of the property of more than 5%. Only those measures that are expected to cause such devaluation would be exempt from installation
• There will be no requirement to install wall insulation under the regulations where the landlord has obtained a written opinion, from a suitably qualified person or from the independent installer engaged to install the measure, advising that it is not an appropriate improvement due to its potential negative impact on the fabric or structure of the property (or the building of which it is part)

Temporary exemptions

Temporary exemptions can apply where someone has recently become a landlord to allow time for work to be done, provided one of the following conditions are met:

• The grant of a tenancy due to prior contractual obligation (this can include a situation such as conditional contract regardless of whether it was entered into before or after the Regulations come into force)
• If a tenant becomes insolvent and a guarantor takes over the tenancy
• A new lease is created by operation of law. Importantly, this extends to situations such as a statutory periodic tenancy starting, which is a deemed tenancy starting beginning when a fixed term assured tenancy (such as a shorthold) runs out and the tenant remains in occupation. It also applies to succession by a family member on death where there is a Rent Act protected tenancy
• As from 1st April 2020 a temporary exemption applies where someone becomes a landlord on purchasing an interest in a property and on the date of purchase it is let on an existing tenancy

In all cases the exemption is for six months from the date when the person becomes the landlord. After six months, the exemption will expire and the landlord must either have during the six month period improved the property or have registered another valid exception or exemption where the property is F or G rated and required to have an EPC.

Registration of exemptions

All exemptions (including temporary exemptions) will be required to be notified to the PRS Exemptions Register which will be operated by the Government. It is planned that this will open from 1st October 2017. It will be essentially a database of exemptions and will be open to public inspection. Failure to register any exemption will render the exemption ineffective, and will amount to non-compliance with the regulations. The Enforcement Authority will be entitled to require landlords to furnish them with evidence supporting a claim for an exemption. Landlords will also be in breach of the regulations if they claim an exemption to which they are not properly entitled.

Where someone becomes a landlord while the exemption is already registered then the new landlord must re-register the exemption. Exemptions claimed by a landlord may not pass over to a new owner or landlord on a sale or other transfer and on transfer they will cease.

Duration of exemption

Exemptions will only endure for 5 years. They will then need to be reviewed to see if they are still effective. If not the work will have to be carried out. If the exemption is lack of tenant’s consent then this will only last for 5 years or the end of the current tenancy, if sooner. As noted above temporary exemptions only last for 6 months.

Principles of the exemptions register

Information placed on the register must be current at the time the exemption is registered. The landlord will have to demonstrate that at the time of registering the exemption the circumstances relied on are applicable. The Regulations lay down what information is required to support the exemption. Enforcement authorities will automatically be notified when an exemption is registered so a landlord registering the exemption may be scrutinized to ensure compliance. Applying to register an exemption to which you are not entitled means you are non-compliant with the Regulations if the property is substandard. In those cases, penalties can be imposed accordingly.

Registering exemptions

Before a landlord can register an exemption on the register they will have to set up a unique user account for the site which will include name and contact details. This account will then enable landlords to register exemptions for one or all properties to manage their exemptions via a single user portal. The landlord is then required to submit information relating to the particular property to be exempt, alongside information and evidence to support the exemption relied upon. The information required for all exemptions is as follows:

• The address of the relevant property
• Which exemption a landlord is registering
• A copy of a valid EPC for the property

An additional exemption and evidence is then required for specific exemptions. This is set out at the end of this Guidance.

Exclusions

A dwelling will not be a Domestic PRS property because it is not let on an assured tenancy in specified circumstances. This means therefore that the Regulations prohibiting letting of individual self contained residential properties that do not attain a minimum E rating will not apply (unless it is one of the other tenancy types within the scope of the Regulations) where they are one of the following types of property:

Improvements which can be required

The following improvements are those which a landlord can carry out and which are eligible to qualify to comply with the Minimum Energy Efficiency Standards:

• Air source heat pumps
• Thermostat boilers
• Thermostat room heaters
• Cavity wall insulation
• Solid wall insulation (internal or external)
• Cylinder thermostats
• Draught proofing
• Duct insulation
• Hot water showers/systems (efficient)
• Hot water taps (efficient)
• External wall insulation systems
• Fan assisted replacement storage heaters
• Flue gas recovery devices
• Ground source heat pumps
• Heating controls (for wet central heating systems and warm air systems)
• Heating ventilation and air conditioning controls
• High performance external doors
• Hot water controls (including timers and temperature control)
• Hot water cylinder insulation
• Internal wall insulation (or external walls)
• Lighting systems fittings and controls (including roof lights, lamps and luminaires)
• Loft or rafter insulation (including loft hatch insulation)
• Mechanical ventilation with heat recovery
• Micro combined heating power
• Micro wind generation
• Pipework insulation
• Photovoltaics
• Chillers
• Gas fired condensing boilers
• Replacement glazing
• Oil fired condensing boilers
• Warm air units
• Radian heating
• Roof insulation
• Warming roof insulation
• Ceiling improvements (including duct ceiling)
• Secondary glazing
• Solar water heating
• Solar blind, shutters and shading devices
• Transpired solar collectors
• Under floor heating
• Under floor insulation
• Variable speed driers for fans and pumps
• Waste water heat recovery devices attached to showers
• Water source heat pumps