Receivership Tip: Lenders – Ensure Your Security has an Environmentally Clean Bill of Health

The latest tip from our Receivership team

Energy Performance Certificates (EPC) 

Residential 

Currently, residential properties need an EPC at Band E or above before selling or letting.

By 2025, landlords will need to ensure homes reach EPC Level C or better for new tenancies, and by 2029 for all tenancies. This means that a 10-year property loan will fall within this requirement.

This will impact most landlords as it is estimated that 7 out of 10 of all landlord-owned properties in the country are ranked below C, with 8 out of 10 pre-1919 homes being D or lower.

There is also the issue of whether all properties can achieve a C rating and at what cost. For a Victorian property, it may be necessary to insulate walls, for example, but a landlord may not own the freehold or flats above or below. The cost to achieve these requirements may be significant and impact the value.

Commercial

Since 2018 a minimum EPC rating of E has been in place for new tenancies, but from 1st April 2023, this is set to change, and the same rules will apply to all existing leases. 

It will be unlawful for a landlord to continue to let a commercial property with an EPC rating of less than E.

The Government estimates that approximately 18% of commercial properties are currently in the EPC F and G rating brackets.

A key element is that landlords should not carry out works to be just above the Band E threshold. This is because The UK Energy White Paper in December 2020 confirmed the policy intention that the future trajectory for non-domestic properties will be Band B by 1st April 2030.

Outcomes for Lenders

Residential 

Lenders need an average EPC rating of Band C across all their residential buy-to-let loan books by 2030. 

Banks may restrict new lending to homes with high EPCs to offset loans already made on properties with low ratings.

When granting the loan, lenders should ensure that the asset complies with the EPC requirements. Failure to do so could result in the lender facing significant costs and time delays bringing the property to the necessary standards should they need to repossess. 

Commercial 

Before granting a loan over a commercial property, lenders should ensure that the property comfortably adheres to the requirements of being above a Band F or G. Otherwise, the property will be reduced in value.