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EPC Changes and the Green Deal...Is it time to get Energy efficient?

Thursday, February 28, 2013 Posted in: Property Market Landlords

Since 1st October 2008 all properties on the market for sale or to let will require an Energy Performance Certificate by law in England and Wales. Energy Performance Certificates are part of a European law to make consumers more aware of how green a building is. An EPC has two ratings. The Energy Efficiency rating which measures how efficient a building is, and the Environmental Impact rating detailing the CO2 impact.

This new legislation has had little effect on the PRS since it was introduced only requiring that Landlords produce and Energy Performance Certificate (regardless of rating) for properties being marketed for rent. However things are due to change from 2016 tenants will be able to demand reasonable energy efficiency improvements from their landlords. If these requests are refused local authorities will be able to compel landlords to undertake the improvements. They will also be able to fine landlords for not undertaking the improvements when first requested by the tenant. From April 2018 it will be unlawful to let residential or commercial properties with an EPC Rating of F or G (i.e. the lowest 2 grades of energy efficiency). This could have a very significant impact on landlords nationwide as it is estimated at 20% of housing stock in the PRS would fall into this bracket. 

To address the implications of the proposed changes, landlords will need to assess the status of their properties’ energy efficiency. Thereafter, they will need to consider undertaking retrofits or refurbishments to address the various issues. The EPC scores each property on 9 categories (Walls, Roofs, Floor, Windows, Main heating, Main heating controls, Secondary heating, Hot water and Lighting) each of these categories is then given a rating from current energy and environmental performance and this is the basis of the score given.

The Green Deal

The Government’s expectation is that the “Green Deal” will provide the finances to carry out the improvements. The Green Deal seeks to address what has become known as the “split incentive” by allowing landlords to make energy efficiency improvements without having to pay for them upfront. The cost of these works will be financed by a financial institution such as the Green Deal Finance Company*. This finance will be a loan secured against the landlord’s property with existence of the loan being documented at the Land Registry. The new revised EPC will also record the presence of Green Deal finance of a particular property. The repayment of the “Green Deal loan” will be made from the savings generated on the energy bills of the person paying the bills. For the majority of investment properties this will be the tenant. However during voids the responsibility will revert back to the landlord. (As is the case for now for utility bills). 

To protect tenants (and all householders) there will be a “Golden Rule Principle” which aims to keep the energy bills at the property no higher than they would have been had the property been without a Green Deal – this is important both to protect consumers from higher energy bills, and to protect investors from a higher risk of default on the bill. As the tenant will be responsible for effectively paying the Green Deal finance, the landlord will have a legal obligation to advise the tenant that Green Deal finance is in place. The Golden rule described above will protect tenants from paying higher energy bills if they rent a property with Green Deal finance as opposed to one without. In theory this should not mean that Green Deal properties will not be any less desirable to tenants. Landlords who have commissioned the new style EPC which identifies the presence of Green Deal finance will comply with this disclosure requirement by providing prospective tenants with a copy of the EPC.

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