There has been much talk about the effect on landlords of the new standards around energy efficiency, known as the Minimum Energy Efficiency Standards (MEES). Any property in England or Wales (the rules are different in Scotland) that now achieves an F or an G rating can no longer be let to new tenants. Although it will still be able to be let to existing tenants for the next couple of years, until April 2020 for residential property, with an extra three years for commercial at that point in time it will need to hit the new standards in order to continue being let out
The challenge for many landlords is the capital costs they need to incur to get the property to the standard it needs to be in order to let it out. This applies whether it is a residential or commercial property. Arguably, landlords of commercial property have a much tougher target to hit if they own a building with a number of different offices, all let to different companies.
To upgrade such a property will usually require any works to be taken at evenings and weekends, in all likelihood incurring a higher cost than would be the case if the work could take place in the day. For residential properties that now cannot be re-let until the property has hit the required standards, landlords are also hit with a loss of rental income.
Non-compliance is not an option however; the penalties for non-compliance start at £2,000 if a landlord has sublet a property in breach of the regulations for less than 3 months, rising to £4,000 for a breach of 3 months or more with a maximum fine of £5,000.
But this is a maximum of £5,000 per property, so the local authority may decide to fine a landlord on more than one property, and, if after previously being fined, the landlord proceeds to let again and fails to meet the regulations again, they may be fined up to £5,000 in relation to the new tenancy.*
Non-compliance with regulations could also result in increased void rates and difficulty in attracting good quality tenants. It seems that the key solution is, get any work done as quickly as possible in order to enable the landlord to re-let the property and start reclaiming any money spent. Not every landlord can lay their hands on the funds required however, which in some cases will run into many thousands of pounds.
Of course the bigger or older the property the higher the costs are likely to be. Landlords are usually looking at work encompassing anything from double glazing, to roof or cavity wall insulation or even a new heating system. In one example, a landlord was quoted £30,000 to get all the work done that their property needed. For a commercial property it can be many times this.
The challenge is that many long-term lenders will now not provide a buy-to-let or a commercial mortgage if the property does not achieve a rating of E or above, even if the borrower has had the property for some time and just needs a remortgage. As a result, we are starting to see an upsurge in borrowers taking out bridging loans in order to fund the work, and then remortgaging back onto a longer-term mortgage once the building achieves the required rating.
Arguably bridging can be the perfect solution in this scenario. The funding can be put in place incredibly quickly, usually in just days, helping to minimise any void period that the landlord suffers while the work is being carried out. Depending on the amount of work required the loan can also be taken usually for as little as three months, minimising the loan costs, while if the work is completed quicker than expected, the borrower can sometimes pay the loan back early).
This is likely to be a growing issue over the next two years as every landlord will need to assess their property and ensure it meets the standards required in order to continue to let it out. What’s more, just because a property has achieved an E rating in the past does not mean that it will now. Standards have got tougher, methods of assessment are more sophisticated now than they were previously and research by arbnco indicates that one in five commercial properties would have a lower EPC rating if newly assessed, with many of those possibly just an F or G rating. A new EPC will also revoke an earlier EPC.
It is clear that there is no time to waste for landlords whose properties may not meet the necessary standards. Instead of the next remortgage, a bridging loan may well be the answer to raise capital and get the work achieved first.
*Page 83 of The Guidance for landlords and Local Authorities on the minimum level of energy efficiency required to let domestic property under the Energy Efficiency (Private Rented Property) (England and Wales) Regulations statesthat each individual infringement is penalised in the following manner:
- Renting out a non-compliant property and the landlord is less than three months in breach): up to £2,000 and/or publication penalty;
- Three months or more in breach: up to £4,000 and/or publication penalty;
- Providing false or misleading information the PRS Exemption Register: up to £1,000 and/or Publication Penalty;
- Failure to comply with a compliance notice: up to £2,000 and/or Publication penalty.
There is a maximum level of penalty which applies to each property. This is set at £5,000. This means that if, for instance, a landlord is fined £2,000 for being in breach of the Regulations for less than three months, and they continue to let the property below the minimum standard after three months, the most they can be fined for a three months or more breach, will be £3,000. £5,000 in total.