Since 2018, property in the private rented sector (PRS) has had to meet minimum standards for energy efficiency. The government is proposing to make these minimum standards stricter in the near future – a move which would affect millions more homes across England and Wales.
As the official property sales partner of the National Residential Landlords Association, Movewise has heard from many landlords who are concerned about the proposals, have heard conflicting information about them, or are unsure what actions they should take. Equally, some landlords seem to be under the impression that because no changes have yet been officially confirmed, they don’t need to do anything.
In fact, we would advise all landlords to familiarise themselves with the changes that may be on the way, and take action sooner rather than later.
This guide summarises the current regulations, outlines the proposals, and advises landlords on how they can prepare for the new rules, protect their portfolios and make sound investments.
NB: The information in this guide applies to England and Wales only. The situation differs in other parts of the United Kingdom: you can find the latest information for Scotland on the Scottish Government website, while Northern Ireland does not currently have specific energy efficiency legislation for the private rented sector.
Energy Performance Certificates, or EPCs, were first introduced in 2007, and since 2008 most properties have needed one before they can be sold or rented. EPCs provide a standardised measure of the energy efficiency of a property, taking into account factors such as construction, insulation, glazing, and the type of heating system.
To get an EPC you generally need an assessor to visit the property and inspect these factors – although this isn’t always the case. For example, where there are several very similar properties in a block, it may be possible to get an assessment based on previous inspections of other units. There are also certain exceptions, for example listed buildings and those in conservation areas are generally held to be exempt from EPC requirements (although this is something of a legal grey area, which is likely to be cleared up by the proposed changes).
The EPC certificate gives a score from 1 to 100, known as the SAP (Standard Assessment Procedure) score, which places the property into one of seven rating bands, from A to G. (Scores of 1 and G are the lowest, 100 and A the highest.) It will also show a potential rating, showing the score that could be achieved with some improvements. The certificate will give examples of recommended work to improve the rating.
In 2015, new laws were introduced known as The Energy Efficiency (Private Rented Property) (England and Wales) Regulations. Among these regulations were minimum standards known as the MEES rules, stating that private rented property must have an EPC rating of E or above. These standards came into force progressively, so that by 1 April 2018, any property offered under a new tenancy had to meet the minimum, and two years later, on 1 April 2020, all PRS property, including existing tenancies, had to comply.
However, the MEES rules include several exemptions, which landlords can register for if they cannot bring their property up to the required level. Two of these are related to the maximum cost which is required to be spent per property: currently £3,500, including VAT. Note that this figure includes third-party funding and grants, so the landlord is not necessarily required to spend this much out of their own pocket. For example, if they receive funding of £2,000, they only need to spend a further £1,500 on improvements to meet the cost cap.
The full list of exemptions from MEES requirements can be found on the gov.uk website, along with the requirements for applying. All of these exemptions last for a period of five years (except for the temporary six-month exemption for new landlords), following which you will need to reapply (or carry out improvements if you are then able to do so). Here is a summary:
‘All relevant improvements made’ exemption
This applies if the property is still below EPC E after improvements have been made up to the cost cap, or there are none that can be made.
To register this exemption you need to submit details of all recommended improvements you made at the property (unless none were recommended), including the date they were installed.
‘High cost’ exemption
This applies if no improvement can be made because the cost of installing even the cheapest recommended measure would exceed the cost cap.
To register this exemption you must submit three quotes from qualified installers for purchasing and installing the cheapest recommended measure, demonstrating that the cost would exceed £3,500 (including VAT).
Wall insulation exemption
This applies if the only recommended improvement measures were cavity wall insulation, external wall insulation or internal wall insulation (for external walls), and you have obtained written expert advice showing that these measures would negatively impact the fabric or structure of the property (or the building of which it is part).
To register this exemption, you need to submit a copy of this written expert opinion in order to register the exemption.
Third-party consent exemption
This applies where the relevant improvements for your property need consent from another party, such as a tenant, superior landlord, mortgagee, freeholder or planning department, and despite your best efforts that consent cannot be obtained, or is given subject to conditions you could not reasonably comply with.
To register this exemption, you need to provide copies of correspondence demonstrating that consent for the recommended measure was required and sought, and that this consent was refused, or was subject to a condition that you were not reasonably able to comply with.
Property devaluation exemption
This applies if you can show that making energy efficiency improvements to your property would devalue it by more than 5%.
To register this exemption you will need a report from a RICS-registered surveyor, advising that the installation of the relevant improvement measures would reduce the market value of the property, or the building it forms part of, by more than 5%
Temporary exemption due to recently becoming a landlord
This applies if you have recently become a landlord, and allows a six-month grace period from the date you became a landlord. After this period, you need to either have brought the property up to an E rating, or have applied for one of the other exemptions.
To register this exemption, you need to provide details of when and how you became the landlord for the property.
Note that these exemptions are linked to the current landlord, not the property itself. If you buy a property which is currently exempt, the exemption will not automatically be transferred to you, so you will need to either apply for your own exemption or carry out the necessary work to reach an E rating.
Failure to comply with the minimum rating without a valid exemption, or providing false information when applying for an exemption, can result in a fine of up to £5,000 per property.
Four years have now passed since these new standards began to come into force, and they have been quite effective at improving the energy efficiency of the PRS sector. The latest statistics show that there has been a big shift towards the higher end of the EPC scale over the last 10 years. By 2020, only just over 4% of the PRS housing stock in England and Wales was still in bands F and G, although that still represents about 180,000 properties. In 2010, that figure was over 14%, more than three times as high.
While many landlords may feel that the last thing they needed was more regulation and expense, it is important to remember that improving energy efficiency does make for more pleasant living conditions and lower living costs for tenants, as well as making your property more desirable. This is likely to be reflected in higher property values as well as higher achievable rents.
In autumn 2020, the government began a consultation on amending the 2015 regulations to further improve the energy efficiency of the private rented sector. This was spurred largely by the government’s commitment to reduce UK carbon emissions to “net zero” by 2050, which would require emissions from housing to be largely eliminated. The consultation document pointed out that PRS properties are generally less energy efficient than those in other sectors, and even after the improvements created by the first MEES regulations, 3.2 million properties in the sector were rated D or below. Households living in PRS properties are also more than twice as likely to suffer from fuel poverty.
It’s important to note that the proposals are currently just that, and no regulations have even been drafted yet. The consultation closed in January 2021, and the original timeline called for the outcome to be published in spring 2021, with legislation being passed in autumn 2021. At the time of writing (June 2022), the results of the consultation have still not been published.
However, the main changes according to the government’s preferred options would be as follows:
The exemptions that are currently available to landlords would remain largely unchanged under the proposals, although the consultation does ask for opinions on setting an affordability exemption which could be based on an landlord’s annual profit or turnover. Additionally, the proposals recommend clarifying the rules regarding EPC requirements for listed buildings and those in conservation areas, and introducing a central database of compliance and exemptions.
These are the main proposals in more detail:
MInimum EPC rating to be raised from E to C
The proposals suggest implementing the higher standards over time, similar to how the minimum E rating was introduced. The suggested timeline would see the new rule enforced from 1 April 2025 for existing tenancies, and from 1 April 2028 for new tenancies. However, given that the original timeline set out in the consultation is already more than a year behind schedule, it is not unreasonable to assume that these dates may be pushed back, perhaps to tie in with the government’s 2030 target for improving the rating of fuel-poor homes to C.
Cost cap to be raised from £3,500 to £10,000
Given that more significant works are likely to be needed to raise the EPC rating of many properties to C the proposals include raising the cost cap almost threefold – again, including any grants or other funding. The government’s estimates suggest that spending £10,000 would be sufficient to bring more than 90% of D-rated properties up to a C rating, as well as nearly 60% of E-rated properties. Of those rated F and G, only around 10% could be improved to level C.
Landlords who have multiple properties could find themselves facing large outlays if these proposals come into force, and there is a danger that smaller landlords may not consider it worthwhile spending up to £10,000 to preserve a small rental income: the consultation acknowledges that at least 15% of landlords have an annual profit of £1,000 or less. However, the government estimates that on average, the actual amount needed to bring properties up to a C rating would be less than half of the cost cap: around £4,700.
A further recommendation in the consultation document is for the cap to be adjusted for inflation, given that it is likely to be in place for longer than the current cap.
Maximum penalty to be raised from £5,000 to £30,000
As the proposed cost cap would be higher than the current maximum penalty, the government proposes to increase the penalty in order to make it an effective deterrent. At the same time, it proposes giving greater powers to tenants to require landlords to carry out improvement works, and providing redress to make up for higher energy bills incurred because properties are not up to standard. The proposals also include giving local authorities greater powers to enter PRS properties to inspect for breaches of MEES rules.
Introducing a “fabric first” policy
This proposal seeks to control in which order energy-efficiency works are carried out, so that improvements to the fabric of the building (ie insulation, windows and doors) must be done before additional measures such as new heating systems or renewable energy generation are installed. Currently, recommended improvements are listed on EPC certificates in order of cost efficiency, but landlords are free to carry them out in any order.
The rationale for this proposal is that by improving the fabric of buildings, landlords can reduce the amount of energy needed to heat them. This in turn will make them more suitable for low-carbon heating systems such as air-source heat pumps, which operate at lower temperatures.
While it is true that the changes are currently only at the proposal stage, it is highly likely that the minimum energy-efficiency standards for rented property will indeed be tightened. As outlined above, the government has made a serious commitment to reducing carbon emissions, with an ultimate goal of “net zero” by 2050, and this will not be achievable without major changes across the nation’s housing stock. Clearly, in one form or another, we will all have to make those changes before long.
However, it is also important to stress that there are benefits to boosting your EPC rating. Yes, as a landlord you may well need to spend money if you want to continue letting your property without risking a hefty fine, but you shouldn’t underestimate the advantages of making properties more efficient.
1: Increase the value of your portfolio
Improving the energy efficiency of a property makes it more desirable, which in turn makes it more valuable. The government commissioned a report from the University of Cambridge to look into this, which used complex analysis to try to untangle the effect of EPC ratings from other factors on property sale prices. Obviously, properties with high EPC ratings tend to be more modern and in generally better condition, but the study attempted as far as possible to isolate the EPC rating from everything else. What it found was that properties rated B and C attracted a premium of around 5% over those rated D. At the other end of the scale, the lowest rated properties, in bands F and G, tended to sell at a discount of between 9 and 11% compared to band D.
This suggests that even if you have a modest property with an EPC rating of D, which is valued at £100,000 before improvements, if you spend the government’s estimate of £4,700 on typical improvements to get it up to grade C, you could boost its value by £5,000: more than you spend. For higher valued properties, the potential profit becomes greater; indeed for properties valued above £200,000, a 5% uplift in property value would be greater than the maximum spend cap under the new proposals.
2: Reduce your energy bills
With owner-occupied properties this is an obvious benefit – you spend some money on improvements, which you can then recoup through lower running costs. With rented property, of course, it’s not you who gets to enjoy the benefit, it’s your tenants. (An exception would be where utilities are included in the rent – common in student housing, and also increasingly popular in HMOs. In these cases, the advantage to the landlord is even greater.)
But energy bills keep on rising, and for many tenants their bills are a significant part of their monthly outgoings. In simple terms, if they are paying less for their energy bills, they can afford to pay you more rent, so you can put your prices up a little. That same report found similar results with rents: a B or C rated property commands about 5% more rent than one rated D, although the discount at the bottom end was less: around 5-6% for F and G rated properties.
Excessive energy bills are also a big reason why people can get into financial difficulties, so reducing bills will make it less likely that your tenants get into arrears. Plus, of course, a warm and comfortable home will mean happier tenants than a cold and draughty one.
3: Protect the fabric of your property
Keeping a property warm and dry, and replacing draughty or leaking windows, will tend to make it less prone to condensation, damp and mould issues, reducing maintenance costs and preventing possible structural damage. Do bear in mind, though, that not all insulation measures are suitable for all properties: older buildings especially were often designed to “breathe”, and making them more airtight can actually lead to more problems with damp. Take professional advice before carrying out such work, and remember that exemptions are available where they would be likely to damage the building.
Many landlords seem to be taking a “wait and see” approach to the new measures. Some may even see it is the final straw and quit the rental sector altogether: Landlord Today reported a survey late last year that found 52% of landlords who own property rated D or below have thought about selling some or all their properties because they don’t think they’ll be able to get them up to standard.
Quite apart from the potential shortage of rented property this could create, which would have an obvious detrimental effect on housing availability, leaving the sector could have a serious financial impact on landlords. One survey earlier this year put the estimated loss of earnings to landlords at £9,500 per year on average, if they could no longer let their properties due to the new rules.
Then there is the risk to capital investment. As shown above, improving the EPC rating of a property can add 5% or more to its value, and it is likely that this gap will increase if new rules make lower-rated properties ineligible for rentals. So by failing to make improvements, landlords risk harming the value of their investment. This risk could be amplified if large numbers of landlords decide to sell up. Particularly in areas with a high proportion of PRS property, this could lead to an oversupply of property on the market, which would drive down prices even further.
Even in cases where property reverts back to owner-occupation, values are likely to be increasingly harmed by lower EPC ratings over time. As part of its drive to reduce emissions, the government wants mortgage lenders to commit to a minimum average rating of C across their whole lending portfolio by 2030, so they may become less keen to lend on lower-rated properties that would drag down their average. In turn, this would reduce mortgage availability on those properties and limit the pool of buyers. Traditionally, such less mortgageable properties have often been bought by cash buyers as investments, but if they cannot be rented out, they would become unattractive to investors too.
Even landlords who accept that they will need to spend money to get their properties up to standard may be tempted to delay doing anything until the proposals turn into actual legislation. This is likely to be a mistake, especially if the government pursues its original frailty aggressive timeline: if this is the case, then properties being advertised for rent would need to meet the new standards by April 2025: less than three years away. There are good reasons to assess your property now and start planning improvements.
1: Beat supply shortages
Anyone who has been trying to get building work done recently will know that materials and labour have been in short supply. The pandemic caused a double problem, with supply chains being disrupted at the same time as many people, stuck at home for an extended period of time, realised that they needed to extend or renovate their properties. When tighter MEES rules are announced, there is likely to be a rush to order materials such as insulation, windows and energy-efficient heating systems, further increasing lead times and prices. Additionally, past experience shows that schemes to encourage energy efficiency measures (for example the feed-in tariffs for solar panels) have led to a shortage of reputable tradesmen and encouraged cowboy operators to spring up to take advantage of demand.
2: Spread the cost
By starting now, you can spread the cost over a longer period of time rather than suddenly facing a large expense to meet the deadline. This will also give you more time to seek additional sources of funding, such as grants.
3: Increase flexibility
One of the proposals the government is considering is the “fabric first” principle. If approved, this would potentially restrict the work you could do to improve your property. For example, if you want to upgrade the heating system, a “fabric first” policy could mean that you would be unable to do so until you have improved insulation or replaced windows, which could be more disruptive and inconvenient than simply fitting a new boiler. If you can get the property up to a C rating now, then these measures will not affect you. Having said this, remember that improving insulation will often be the single most cost-effective means of improving a property’s EPC rating.
While it is easy to focus on the negative aspects of increased regulation, the proposed changes could also be an opportunity to add value to your portfolio. There are two main ways to capitalise on changes to the MEES rule.
1: Find newer property to rent
In areas where there are lots of older rented properties that may be harder to upgrade, there could be a significant exodus of landlords, which would lead to a shortage of rental properties. When looking for potential investments, look beyond the obvious rental stock and consider more modern properties or new-builds, which will have been built to modern energy-efficiency standards. Look for owner-occupied properties, too, which could be easily converted for rental use. Although the initial capital outlay is likely to be higher for such properties, you could be well placed to find tenants when the supply shortage begins to bite.
2: Look for cheap fixes
Although less than half of PRS property is currently rated C or above, the vast majority of the remainder is in band D. In fact, there are more properties rated D than those rated A, B and C put together. This suggests that there are a lot of properties that are only a little way short of getting a C rating.
EPC certificates will give you a good idea of how easy it could be to get those extra SAP points, and in many cases it might not be very expensive at all. The government publishes detailed statistics about the UK’s housing stock, which reveal some possible quick fixes. For example, 41% of PRS housing with cavity walls doesn’t currently have insulation in the cavity. Similarly, more than a third of properties with lofts lack proper insulation. That represents a vast amount of potential improvement for a relatively small investment.
Cavity wall insulation can be completed in a few hours, at a cost of less than £500 for a typical house. Loft insulation can be topped up to the recommended minimum depth of 270mm for a similar amount, or less if you can do it yourself. Put together, these two measures could add as much as 25-30 points to the EPC score of a badly insulated property, at a cost of less than £1,000. That could be enough to push the EPC rating up by two whole bands.
Heating systems are another area that could be improved – at a higher cost than insulation, but still potentially a good investment. Only 83% of PRS property currently has central heating, compared to 95% of owner-occupied homes. Replacing outdated electric radiators or storage heaters could significantly improve the EPC rating: depending on the type of heater the improvement could be between 10 and 15 points.
There are various grants and funds available that may be able to help with the cost of energy-efficiency improvements. Remember that the cost cap takes into account any funding you receive, so you can deduct this from the amount you would need to spend yourself.
The government previously ran a system called the Green Homes Grant, which was referenced in the consultation as a potential source of funding for landlords to access. However, the scheme didn’t end up working as planned and it was closed down last year. It has been partially replaced by the Boiler Upgrade Scheme, which launched in April and will pay £5,000 towards the cost of installing low-carbon heating systems such as air-source heat pumps. (This also replaces a previous scheme called the Renewable Heat Incentive, which paid a rebate for heat generated by green energy.) Unfortunately, because the way that EPCs are calculated tends to favour gas over electric heating, you may not see any improvement to your EPC score if you are replacing a boiler. However, if you currently rely on electric heating, you could certainly improve your EPC rating as well as significantly reducing bills.
Following the demise of the Green Homes Grant, there are still some regional grants available. You can search by postcode on the Simple Energy Advice website to find details of those available in your area.
Some sources of funding require people to be receiving benefits, but as a landlord, it’s your tenants who have to qualify. If this is the case, you can apply on their behalf. For example there is the Energy Company Obligation, which means energy suppliers may be able to assist with improvements to insulation or heating upgrades. For properties in London there is the Warmer Homes programme, which offers grants of between £5,000 and £25,000 to low-income tenants. Again, as a landlord you can apply for this on behalf of your tenants.
One frequently asked question about the MEES rules is where the responsibility for making improvements lies, particularly where the rented property is leasehold, so the landlord does not own the fabric of the property.
In general, the responsibility of making improvements to the property falls to the landlord, so if you are a leaseholder who rents a flat out under a private tenancy, then it is your responsibility to make energy-efficiency improvements. The same regulations that set out the MEES rules also give you the right to request permission to carry out improvements from the superior landlord (in this case, the freeholder), at your own expense. The superior landlord cannot withhold permission unreasonably. However, where work would need to be done on the fabric of the entire building (for example, a block of flats), then things become more complicated. The responsibility and cost of this work will depend on the wording of your lease, and agreement is likely to be required from other leaseholders. Where the majority of other leaseholders are also landlords, it may be in everyone’s interest to support improvement works, but where the other parties are owner-occupiers not subject to MEES rules, they may be less keen to spend money on improvements. Remember, though, that refusal of third-party permission is a valid reason to apply for an exemption.
Note that your own tenants have the same right to request permission to carry out energy-efficiency improvements at their own expense (or with funding they have secured). As a landlord, you cannot unreasonably withhold permission.
While at the time of writing (June 2022), it is still unclear what changes, if any, are on the way to minimum EPC requirements for rented property, it seems very probable that the government will tighten the rules in the near future. In turn, this is likely to cause an increased divide in value between higher rated and lower rated property in the PRS sector.
With this in mind, our recommendations would be:
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