The Green Deal
Jonathan Richards of SGH Martineau LLP discusses the government’s Green Deal. It is a positive step towards greater energy efficiency but there are legitimate concerns amongst lenders about its potential impacts
The Green Deal effectively creates a ‘pay as you save’ financing mechanism to enable energy efficiency measures to be installed in homes and businesses at no upfront cost with payments being made through energy bills and a “golden rule” that expected savings for home-owners must be greater than, or at least equal to, the costs attached to the energy bill.
Homeowners and business will be able to obtain finance for measures from 28 January 2013.
In June 2012 the Department for Energy and Climate Change (DECC) announced its long awaited final proposals for the Green Deal following a consultation in 2011.
More recently, the Council of Mortgage Lenders (CML) published a policy document to help its members prepare for the Green Deal. The CML welcomes the Green Deal for its potential to reduce energy costs on mortgaged properties but has also identified several concerns in relation to lending, saleability and mortgage defaults.
As properties with Green Deal installations and associated finance plans begin to transact the CML fears several issues will emerge which could ultimately affect the success of the scheme.
In an effort to protect lenders and avoid criticism of the lending industry which could block the Green Deal scheme, the CML and DECC will work together to review implementation of the Green Deal and develop industry solutions to anticipated problems.
The government has acknowledged concerns regarding buyers of property inheriting Green Deal liabilities and this is an issue for lenders in making their affordability assessments.
The government has taken the view that inheritance of a liability is commonly encountered in property law and is acceptable in relation to Green Deal installations. Lenders may consider indemnity insurance prior to lending to counter this risk of liability.
A lender’s security may also be affected if an existing borrower wants to install Green Deal measures. Unfortunately lender consent is only required in the application process for Green Deal finance when the work will involve structural alterations.
However, the risk for lenders is not only limited to when structural work is carried out because any Green Deal measure may affect the saleability of a property or may be faulty and cause latent damage to the property, affecting its value. Lenders may wish to manage this risk by amending their terms and conditions of lending so that consent must be obtained before any Green Deal measures are installed.
The potential for Green Deal measures to negatively affect property prices increases risk for lenders. The CML is concerned that Green Deal financing will restrict the saleability of a property and impact the liquidity of the housing market.
On the other hand it is vital that lenders see the complete picture when making a decision to lend and they must be aware of the existence of Green Deal Plans when making an assessment for a new customer.
The Green Deal (Disclosure) Regulations 2012 help in this regard by setting out timeframes in which a seller must inform a prospective buyer of a Green Deal installation – generally this is either on or before viewing the property (if a buyer makes an offer before viewing it must be disclosed as soon as practicable and before accepting the offer). This provides lenders with the opportunity to take into consideration the existence of a Green Deal plan when making a lending assessment.
There is also a requirement of a written acknowledgment from a prospective buyer or tenant to the effect that they are aware of, and agree to be bound by, the Green Deal charges. This acknowledgement must be included in a prominent place in any contract effecting transfer. In order to discharge their professional duties estate agents and solicitors will be required to advise on the effective discharge of the disclosure and acknowledgement obligations.
The CML has also expressed concern over a lenders liability for Green Deal finance in the case of mortgage default. Part of the problem is the fact that the so called “Golden Rule” isn’t so much a rule as an aspiration. Homeowners will be liable to repay the Green Deal charge, even if the promised saving on their energy bills does not materialise.
There are also concerns regarding high interest rates in Green Deal finance which will further squeeze domestic budgets.
The Green Deal Framework Regulations stipulate that the Green Deal plan transfers to the person responsible for paying the energy bills. In the event of repossession the lender will, it appears, become responsible for Green Deal repayments for the period it is in possession (though not any arrears accrued prior to this).
DECC’s 2011 consultation proposed that if an energy supplier writes off the energy debt after the customer has left the property, the Green Deal provider can still pursue the Green Deal arrears providing it notifies the debtor of this within seven days.
This proposal is welcome because it confirms the lenders protection from inheriting liability for arrears accrued by a borrower, but it is not clear whether this proposal has been implemented in the Regulations and how any such debt can be enforced against the customer.
Importantly the risk of mortgage default should be decreased by the proposed disclosure requirements set out above as they reduce the likelihood of buyers unknowingly inheriting long-term Green Deal finance liabilities that they cannot afford.
Although the CML is making progress in addressing the concerns of lenders in relation to the Green Deal it is still up to individual lenders to develop their own policies to this new initiative. Lenders therefore need to be aware of these issues and engaged in developing bespoke solutions to them.
Jonathan Richards is a solicitor in the energy, projects and commerce team at SGH Martineau LLP