Buy to let lenders will increasingly demand to see that landlord borrowers are complying with the Minimum Energy Efficiency Standard (MEES) regulations which come into force from next month.
From April 2018, a new legal standard for minimum energy efficiency will apply to all rented residential and commercial buildings. The new legal standard brings both threats and opportunities for landlords, investors, developers and lenders.
From 1 April 2018, landlords of buildings that come within the scope of the MEES Regulations (there are a limited number of exemptions) must not market them for sale, renew existing tenancies or grant new tenancies if the building has less than the minimum energy performance certificate (EPC) rating of E, unless the landlord can register a valid exemption. This will extend to all existing tenancies by 1 April 2020.
To establish whether a building and tenancy come within the scope of MEES is not always easy. Generally it can be said that MEES does not apply to:
- buildings not required to have an EPC, for example industrial sites, workshops, non-residential agricultural buildings with a low energy demand, certain listed buildings, temporary properties and holidays lets
- buildings where the EPC is over 10 years old or where there is no EPC
- tenancies of less than 6 months (with no right of renewal)
- tenancies of over 99 years.
To determine whether a building and tenancy come within the scope means consulting two sets of regulations: Energy Performance of Buildings (England and Wales) 2012 and the MEES Regulations.
Having said that, most buy-to-let tenancies will come within the scope, but the government’s Guidance for Landlords here provides explanations of how MEES will apply in particular circumstances for residential and commercial lets, such as leases parts of buildings.
The MEES Regulations will be enforced by Local Authority Weights and Measures (LWMAs) with powers to impose civil penalties set by reference to a property’s rateable value. The penalty for renting out a property for a period of fewer than three months in breach of the MEES Regulations will be equivalent to 10% of the property’s rateable value, subject to a minimum penalty of £5,000 and a maximum of £50,000. After three months, the penalty rises to 20% of the rateable value, with a minimum penalty of £10,000 and a maximum of £150,000.
Following recent changes to the regulations to be followed by mortgage lenders, they are concerned that they are lending to landlords operating viable portfolios. If a rental property is likely to be unviable due to its not complying with minimum energy efficiency standards, then this creates a problem for the landlord when going through the mortgage application process, either for a new mortgage or a renewal / replacement.
OneSavings Bank, through its Kent Reliance and InterBay brands, specialising in buy-to-let mortgages, is one of the first to make changes to its lending conditions to ensure its residential and commercial borrowers conform to the new MEES regulations.
In some circumstances a grace period will be allowed, included in the formal mortgage offer, to ensure that the property receives an ‘E’ rating or better within three months of completion.