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EPC Regulations & Energy Efficiency - A lender's perspective


Following on from our Spring 2017 newsletter, Philip Dine considers the impact of EPC regulations and the energy efficiency of a property through the lender’s eyes and recent developments.

Philip Dine has recently joined Clarion’s banking and finance team as a legal director specialising in real estate finance, acting for both lenders and borrowers. He has spent considerable time working with several lenders to develop and improve their real estate offering.

The energy efficiency of a building is becoming more important to lenders, as well as property owners. Ben Lamb's article in the Spring 2017 Edition detailed the key issues for property owners and a copy of the article can be found here.

The lender's view

But what is the lender’s view? There has been a gradual shift towards greater interest in the energy rating of a property with some lenders now requiring Energy Performance Certificates as part of its property due diligence, even if there is no statutory requirement to have one in place. There are two key drivers for the lender’s interest:

1. Financial viability

The statutory obligation of a property owner to improve the energy efficiency of poorer fairing properties increases the likelihood of higher CAPEX liabilities in the short to medium term. Lenders are increasingly concerned that poorer energy efficiency ratings and the impact on a property owner’s ability to meet additional CAPEX costs could result in potential breaches of financial covenants in their funding agreements.

2. Investment properties

Similar to the risk of financial viability is the potential risk that a property owner will not be able to let a property unless energy improvements are made (the statutory risk) or that tenants are increasingly more interested in energy efficiency when considering whether to take a lease of a property (the tenant factor). On an investment portfolio the serviceability for the loan repayments will largely be dependent on the income stream from the occupational rents, so it is a risk that lenders (and property owners) need to be alive to.

Lenders would appear to be rightly concerned about energy efficiency and the compliance with EPC regulations – the point is no longer an unquantifiable risk at some distance in the future.


But is there light at the end of the tunnel for those questioning why energy improvements need to be made? The Guardian recently reported that government-funded research by the Lender’s Group has found that homebuyers could take out bigger mortgages if a property’s EPC rating was factored into the lending criteria of banks and building societies. The premise is that the most energy efficient properties are cheaper to run and therefore assist with affordability.

The research found that buyers would be attracted by the “perception of value”, putting a real added value on the most energy efficient properties. Experts are quoted in the Guardian as saying that the proposal could be a “major driver” in linking energy performance to house prices (a key driver for property owner’s to strive for the best energy efficiency in their properties).

Whilst the research focussed on the residential market and retail lending, the principle that energy efficiency can have a positive impact (other than the obvious environmental and cost considerations) to all real estate funding in the future should not be discounted. The proposal would also logically have a positive impact on the insulation and building industries.

The building industry

Turning to the building industry, the requirement for new properties to meet certain levels of energy efficiency will usually be included as part of the development proposals at planning stage. The proposal, if it came to fruition, would hopefully see a surge in demand for the most energy efficient of buildings with first time buyers keen to maximise their buying power through improved affordability with lenders.

Whether or not better energy efficiency will lead to measured improvements in property values and lending criteria is still too early to call, but the recent research would certainly suggest that the wheels are in motion.

If you have any queries about this article, EPC regulations implications or wish to discuss real estate funding, please do not hesitate to contact Philip Dine on philip.dine@clarionsolicitors.com



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