The ABCs of EPCs

Always seemingly in the news, Energy Performance Certificates remain a work in progress. Nevertheless, they are important, both as the main measure for the Minimum Energy Efficiency Standards (MEES) regime, and as a driver for other ESG-related regulation in the property industry. The Government continues to review the metrics as they develop policies to decarbonise homes, but it remains steadfastly committed to its EPC Action Plan, published last year, to maximise the effectiveness of EPCs as a tool to help improve the energy performance of buildings.

Making homes more energy efficient is a key part of the government’s push too hit net zero by 2050. As part of that drive for net zero, the government has identified residential property as a key area of reform. Landlords are front and centre of this drive with the expectation that all new tenancies from 2025 will be accredited with an EPC Band C by 2025 and all tenancies by 1 April 2028.

This direction of travel for landlords was established back in April 2018 when the Government introduced the MEES to raise the standards of rental properties and make them more energy efficient. A property can currently be rented if it has an EPC rating of E or above, in most cases it is illegal to rent a property if the rating falls under F or G.

The things we know and the opportunity for brokers

The MEES regulations set a minimum energy efficiency level for domestic private rented properties. All domestic private rented properties that are let on specific types of tenancy agreement, legally required to have an EPC, must have an EPC rating of E to be legally let unless there is a valid exemption.

Estimates put the estimated number of rental properties that would currently fail to achieve the required grade at over three million. When you consider the cost of retrofitting improvements to these properties, it’s easy to see why this is not a small issue and where landlords, and that matter their lenders, might suddenly feel exposed to large unforeseen capital expenditure.

For landlords embracing the change, there is the issue of understanding what needs to be done to achieve the required standards but then there is the question of how this is financed. It is where a broker can make an invaluable contribution to the development of property. Many landlords are battling with higher financing costs and pressures on tenants. The cost-of-living crisis has hit many landlords hard – in particular those running HMOs where energy is often included in rent bills that were agreed before the crisis. Energy costs are now tearing through some landlords’ business models. There are many possible financial options from remortgaging to bridging finance or second charge lending or development finance, but landlords’ plight will need more than a one-size-fits all solution. Brokers need to understand the scale and structure of a landlord’s business to offer the most advantageous way forward.

The starting point is for the landlord and broker to understand what is required. If the property requires an assessment because it hasn’t had one in the last ten years, (you can check here for any current rating and expected outlay to upgrade: https://www.gov.uk/find-energy-certificate) this will require an assessment from a qualified professional from an approved accreditation scheme. The cost of an assessment and the time taken to conduct the assessment may vary depending on the size of the property but will entail a thorough inspection after which the assessor will confirm how long it will take to prepare the report and will provide you with a digital copy of your certificate. If you wish to challenge the assessment you can directly contact the assessor or their accreditation scheme, whose details will be provided on the energy performance certificate. With these done, landlords can look across their portfolios and decide what properties they will invest in, to what degree, and even to let some go if the capital outlay is prohibitively high.

For now, where landlords have been unable to make improvements to at least the required E rating, then the current advice has been to make all possible improvements up to a value of £3,500 (including VAT) and then register for an ‘all improvements made’ exemption. For information on current exemptions see: https://www.gov.uk/government/publications/private-rented-sector-minimum-energy-efficiency-standard-exemptions/guidance-on-prs-exemptions-and-exemptions-register-evidence-requirements#all-improvements-made-exemption.

What comes next?

Landlords and brokers need to be aware that significant changes to EPCs are expected between now and 2030. Recent research carried out by property industry research and measurement group, SPEC, revealed that of 15% of the lodged EPCs were incorrectly rated, with an estimated 35,028 E-rated properties having borderline EPC scores that would likely be downgraded to F if their floor area was accurately measured.

The Government is developing the Standard Assessment Procedure (SAP) which is the EPC methodology that applies to new domestic properties. This will come into force in 2025 alongside the anticipated Future Homes Standard, which should ensure that all new homes built from 2025 will produce 75-80% less carbon emissions than homes delivered under current regulations. SAP 11 sets out many new recommendations and includes further improvements to the EPC methodology.

Of course, much of the change is yet to be enshrined in law (indeed, many of the proposed EPC changes are now considered very ambitious) but this uncertainty is undoubtedly deterring many landlords from acting. A new government, due no later than January 2025, may also change the timetable or accelerate change. But EPCs are likely to remain the benchmark of measurement whatever the broader political or economic weather and acting now is likely to at least avoid the issue of the inevitable bottleneck in getting assessments when the due date comes around. In the meanwhile, it is worth checking what assistance is available in your clients’ area - some useful sources will include Local Government and some local authorities may offer financial assistance too.

Landlords will need assistance in not only financing the changes they decide to make but in deciding what those changes should be and when to undertake them. From the brokers perspective, showing you not only have the financial answers but also a grasp of what is a complex set of changes will mean you can add real value to a landlord’s plight.