New rules for minimum energy efficiency standards in private rented sector

UPDATE 15 January 2021 - We understand that the planned regulations are once again paused due to the ongoing Coronavirus pandemic. We will update further once new timescales are available.

Minimum energy efficiency standards for privately rented residential property are to be brought into force in April 2021, following a delay due to the Coronavirus pandemic. Housing Minister Kevin Stewart confirmed in the Scottish Parliament in November that the intention is that regulations will be brought forward in this parliamentary session.

The updated regulations are not yet available, and guidance is also awaited. This article sets out what we anticipate the regulations will contain.

The Minimum Standard and Timings

Due to the loss of time because of the pandemic, it is understood that the new regulations will now skip the Band E stage and instead go straight to Band D as the minimum energy efficiency standard, following the original timescales for that Band. Therefore:

• From 1 April 2022, a property will be considered "sub-standard" if it does not meet EPC Band D and it will be an offence to grant a new lease of it from that date.

• Between 1 April 2022 and 31 March 2025, a landlord may continue to let a property which is below Band D to a tenant who was in possession on 31 March 2022, without committing an offence.

• From 1 April 2025, it will be an offence to let, or continue to let, a property with an EPC rating of less than Band D, unless an exception or exemption applies.

Exceptions and Exemptions

We anticipate that the exceptions and exemptions will remain largely as originally drafted, though the details of the cost-cap exemption will change due to the removal of the Band E stage.

In brief, the exceptions and exemptions are that:

• there are no relevant improvements to be made;

• all relevant improvements have been made;

• improvements cannot be made due to lack of consent – either of the current tenant or a third party – or consent is granted subject to conditions with which the landlord cannot reasonably comply;

• improvements would have a negative impact on the fabric or structure of the property;

• improvements would breach the cost cap (see further below); and

• a six month temporary exemption in certain circumstances.

If claiming an exemption to allow them to continue to let a sub-standard property, landlords must provide information on/evidence of their claim, which will be registered on a PRS (Private Rented Sector) Exemptions Register which each local authority must create and maintain.

It is worth noting that an improvement is not "relevant" unless it can be financed by grant or loan funding from the Scottish Government. Therefore, in principle, landlords don't need to have their own capital available to undertake improvements – though they may of course prefer to do so rather than take out loans.

The Cost Cap

It is understood that the cost-cap will reflect the previous regulations, in that a total of £10,000 may have to be spent by landlords in seeking to bring their properties up to Band D.

It is not yet clear from what date it will be possible to include works – previously it was going to be possible to include works from April 2020, to be taken account of when the letting restriction came in as at October 2020.

As the new regulations are understood to be scheduled to come into force from April 2021 with the letting restriction from April 2022, then it may be that only works from April 2021 can be counted towards the tally. However, an earlier date may be agreed upon, to seek to ensure that any landlords who have already started works in anticipation of the previous rules coming into force don't lose out.

Penalties

The penalty regime is expected to remain as before, with set penalties as follows:

As well as financial penalties, it is worth landlords keeping in mind that offences under this legislation may well be taken into account as part of the landlord registration process in determining whether the landlord is a "fit and proper person" to be letting property.

Further detail required

Guidance for the previous regulations was never published and questions remain on some points including whether the cost cap limit will be inclusive of VAT, and if it will include ancillary works such as making good/redecoration as well as the hard cost of the improvement.

It is also not clear whether purchasers of a let property will be able to "inherit" the previous owner's exemption, particularly relevant for the cost cap where purchasers will need to understand if they will be expected to spend money on the property.

It is hoped that the new regulations will be laid in Parliament in January, and that guidance will be published in tandem. We will keep the position under review.