Energy Performance Certificates. Energy Efficiency Ratings. Minimum Energy Efficiency Standards. Those thinking about residential energy efficiency will quickly find themselves in a maelstrom of policy, regulations and acronyms. Questions are inevitable and we’ve provided the answers to some of the most common queries.

Is owner-occupied property likely to come into the scope of minimum energy efficiency standards?

In December 2019, a consultation by the Scottish Government set out proposals aimed at improving energy efficiency in owner-occupied homes to a minimum of an EPC C rating and to make this a legally binding target from 2024. Responses were mixed, with some questioning whether a legally binding standard is correct, others questioning the effectiveness of the EPC and a majority disagreeing with the 2024 start date.

There were some points of agreement across the 148 responses, however. Most agreed that the point of sale or point of major renovation should be a trigger point for a property to meet the standard. Seven out of 10 agreed that even if a property cannot fully meet the standard, it should be required to get as close as possible and most respondents agreed that grant support should be focused on households who are vulnerable or in fuel poverty.

Though not UK wide and only at consultation stage in Scotland, it would be wise to anticipate some form of standard to be imposed upon the owner-occupied sector given the burden that emissions from housing already places upon net zero targets. If we take the Scottish consultation as an example, it would be reasonable to expect this standard to follow a similar model to that which is applied to the rental sector, with standards being imposed at specific points in the property life cycle and time-limited exemptions being available in certain circumstances.

Can a higher rent be charged for more energy efficient properties?

Energy efficiency is undoubtedly rising in the priorities of prospective tenants, and understandably so. Energy efficiency does not just mean lower bills but also more comfort and better heath. A recent study by Direct Line revealed that four out of five potential renters would ask their landlord what has been done to improve the energy efficiency of the property. However, there is not yet evidence of a 'green premium' for high performance properties.

What is more apparent is the 'brown discount' – money lost as a result of underperformance. A quarter of respondents to the same survey said poor energy efficiency would be sufficient reason to leave a property or not rent it in the first place.

Realising this, some 83 per cent of landlords surveyed claim to have made positive changes to their properties already. This may be as simple as improving appliances and lighting (undertaken by close to half of landlords surveyed) or it may include more complex measures such as adding new insulation or installing a smart meter (33 per cent and 22 per cent of landlords, respectively). The compliance baseline may be rising, but so too is the standard of voluntary upgrades. Apathetic or inattentive landlords will be left behind.

Will the landlord need to spend the value of the high cost cap again when exemptions expire and need renewal?

Under the current ‘high cost’ exemption system, a domestic property with an EPC rating below E can be let if the cost of making even the cheapest recommended improvement exceeds the ‘high cost’ threshold of £3,500 including VAT.

To qualify, a landlord must provide three quotations from different installers, each showing that the cost of the cheapest recommended improvement exceeds £3,500. Once this exemption is registered, it will remain valid for five years. When this expires, the landlord must try again to improve the property’s EPC rating to meet the minimum level of energy efficiency. However, if upgrades still cannot be made within the bounds of the cost cap, then a further exemption may be registered for another five years.

The consultation on 'Improving the energy performance of privately rented homes' proposes a maximum cap of £10,000 on the total investment on current prices while maintaining the 'same model of self-funding under a cost cap'. It is worth highlighting that this exemption, both now and in the future, will be considered against the total investment.

Under the £3,500 cost cap, recommended upgrades can be made in whichever order the landlord prefers. This order may have significant implications for upfront cost, energy efficiency and future EPC assessments. This will change in the future as a fabric first approach is introduced with the £10,000 cost cap, requiring the materials that make up the building fabric be optimised before considering the systems, such as boilers or heat pumps.

From when will expenditure count towards the high cost cap total?

A phased introduction of the new regulations is proposed, with new tenancies affected from 1 April 2025 and all tenancies affected by 1 April 2028. Despite this, landlords would be able to count spend made in 2023 and 2024 towards the new high cost cap when registering an exemption. Investment made between now and 2023 would be counted under the £3,500 cost cap only, and not the new £10,000 cost cap.

Landlords should consider if an energy efficiency rating (EER) band C could be achieved with an investment of less than £10,000. If that is the case, it may be worth investing sooner rather than later so the benefits of upgrading are realised earlier.

If funding assistance is required, interest rates are at record lows and Clean Heat Grants could be made available as early as April 2022. If not, landlords may wish to wait until 2023, so the cost of upgrades made counts towards a high cost cap exemption if one is required.

Will dwellings let under agricultural tenancies continue to fall outside the scope of EPCs?

The consultation proposed amends to the Energy Efficiency (Private Rented Property) (England and Wales) Regulations 2015. Those regulations apply to assured, regulated or domestic agricultural tenancies and will continue to do so. For this reason, assured agricultural occupancies of farmhouses and farm cottages under the Housing Act 1988 and the Rent (Agriculture) Act 1976 will continue to be subject to minimum energy efficiency standards (MEES).

Should a farmhouse be let as part of a Farm Business Tenancy (FBT) or Agricultural Holdings Act (AHA) tenancy, an EPC will still be needed. However, as FBT or AHA tenancies are not mentioned in MEES regulations that define domestic property, they do not have to comply with the regulations. The exception to this rule occurs when an FBT or AHA tenant sub-lets a residential farm building to a third party; in this case compliance with MEES is required.

For those assured tenancies and Agricultural Holdings Act tenancies agreed prior to 1 October 2008, an EPC is not necessary. If a successor has taken over the tenancy since that date an EPC will be required, but, as mentioned above, MEES compliance will not be necessary. Properties with an agricultural tie will still require an EPC and must comply unless an exemption is registered.

Why are there suddenly so many questions about energy efficiency?

The recent consultation on 'Improving the energy performance of privately rented homes' has made a number of proposed changes to the EPC and minimum energy efficiency standards process for the private rented sector (PRS). Though still only at the consultation stage, it is expected that these changes will come into force with few changes.

Our latest Spotlight on the Rural Homes Energy Challenge looks at what specific impacts those proposed changes will have on the rural sector, and how landlords can act to ensure the best possible outcomes for their property, tenants and themselves.

Further information

Contact Joe Lloyd

Savills Energy & Sustainability