UK: UK Emissions Reduction Schemes – An Update For Property Lenders

Last Updated: 7 December 2015
Article by Sam Boileau, Helen Bowdren and James Irvine

At the end of last year, we wrote about the energy efficiency schemes most relevant to property lenders. In this article, we set out the key developments in this area since then.

Minimum energy efficiency standards

Whenever a domestic or commercial property is built, sold or rented, the owner must commission an Energy Performance Certificate (EPC). This has been the case for several years now without being a major issue for owners or funders. However, focus has returned to EPCs following the recent introduction of a minimum efficiency level for let property.

The Energy Efficiency (Private Rented Property) (England and Wales) Regulations 2015 (the Regulations), published on 26 March 2015, will prohibit landlords from granting new leases or renewing existing leases for properties with an EPC rating below E (i.e. F or G), unless there is an applicable exemption. The new restrictions will apply in stages:

  • to new lets and renewals of tenancies from 1 April 2018;
  • to all existing tenancies for domestic properties from 1 April 2020; and
  • to all existing tenancies for non-domestic properties from 1 April 2023.

Key points to note

  • The prohibition does not apply to all tenancies. For example, those of less than six months (provided the tenant has not already occupied the property for more than 12 months or the tenancy agreement does not provide for extensions beyond six months) or of 99 years or more.
  • The legislation refers to properties below an E rating as being "sub standard". If this term becomes widely used when referring to properties with an F or G rated EPC, it may have a negative "blight" effect, reducing the value of these properties.
  • Where a landlord lets "sub standard" property in breach of the Regulations, that breach does not affect the validity or enforceability of the tenancy. The breach could however lead to enforcement action by a regulator and a financial penalty.
  • Although the current minimum EPC rating is E, the Government may introduce a more demanding minimum level in the future.
  • Certain exemptions apply. However, a landlord can only rely on an exemption if it is on the PRS (Private Rented Sector) Exemptions Register. The Department for Energy and Climate Change will set up the Register, which will be available from 2016.
  • The fines for renting out a non-compliant commercial property can be significant: for breaches lasting three months or more, a penalty of 20 per cent of rateable value (minimum £10,000 and a maximum of £150,000).

The lender perspective

It is likely that the new rules are already affecting some property loans. Potential purchasers or refinancing lenders will increasingly factor the cost of future efficiency upgrades into the price they are willing to pay for, or amount they are willing to lend against, affected properties.

Changes to the CRC Energy Efficiency Scheme

The UK Government reviewed the CRC Energy Efficiency Scheme (the CRC Scheme) as part of the July 2015 Budget. HM Treasury and the Department of Energy and Climate Change then published, in September 2015, a consultation on reforming the business energy efficiency tax landscape. This consultation proposed:

  • abolishing the CRC Scheme and the climate change levy and replacing them with a single new tax; and
  • drawing together the most effective elements of the current energy efficiency and carbon reduction reporting schemes into a single reporting framework.

The Government is expected to publish its formal response to this consultation in the 2016 Budget.

The lender perspective

Lenders to entities within the scope of the CRC Scheme (large energy users in the public and private sector) should therefore be aware that, although it still applies today, there is a big chance it will be shortly abolished, and replaced with a new framework based on the Energy Savings Opportunity Scheme (ESOS). (ESOS is a scheme introduced in 2014 requiring larger companies and non-public sector organisations in the UK to carry out energy consumption and saving assessments.) If it is, lenders will need to understand how the change affects their borrowers' overall liabilities, particularly financial liabilities.

For a more detailed overview of this topic, see The Carbon Challenge - How emission reduction schemes may affect property lenders.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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