Energy Performance Certificates and the relevance for lenders

Energy Performance Certificates (EPCs) seem to be quite the hot topic in property finance, particularly with proposed changes to the EPC Regulations to be introduced in 2018.

We wrote previously about the changes to come in 2018 (see our articles – energy efficiency regulations and new rules for energy efficiency regulations) , but in short the changes will mean that from April 2018 owners of commercial and residential buildings which are rated below an ‘E’ will not be able to be rented. Further, from 2020 residential properties rated below an ‘E’ will not be able to continue to be rented under an existing tenancy agreement. From 2023, commercial properties with EPC ratings below an ‘E’ will not be able to continue to be rented under an existing tenancy agreement.  There are some limited exceptions to the regulations, but the above is a broad summary of the changes.
Lenders should ensure that they are familiar with the forthcoming changes and the potential impact upon them because:
1. Their borrower customers (i.e. the owners of the properties) may be required to make improvements to the property to enhance its energy efficiency before they can be leased or continue to be leased.   This in turn could mean that the borrower struggles to keep up with mortgage payments due to the fact that (a) they lose rental income whilst they cannot let the property and (b) such improvements could be expensive and again impact the borrower’s cash flow;
2. If the lender for any reason had to repossess and become a mortgagee in possession then they would potentially have to deal with improvements to comply with the EPC regulations (albeit that any costs incurred by a lender in making a property compliant with the EPC regulations or paying fines imposed under the regulations could be added to the borrower’s debt); and
3. Non-compliance with the EPC regulations may adversely affect the value, lettability and marketability of properties which a lender has a mortgage interest in.
4. Whilst further guidelines and announcements are awaited, it is widely anticipated that from 2018 substantial fines (£4,000.00 ) may be imposed for entering into leases where a property has an ‘F’ or ‘G’ energy efficiency rating. Again the imposition of such fines could also be adverse to a borrower’s financial position and ability to keep up with mortgage payments;
Given the above, lenders need to really be considering the forthcoming changes now as 2018 will soon come round and by then they may have already lent and it be too late to re-evaluate come April 2018.
Our Legal 500 recognised Commercial Property team acts for several banks and building societies (in providing independent legal advice to them) and would be more than happy to talk to you if you have concerns over the issues raised in this article.
Speak to one of the team on 0800 088 6004