F means fail: energy-efficiency regulations for landlords

As the government pushes for greater energy efficiency in domestic rental properties, new regulations mean many landlords are having to upgrade, renovate or leave homes empty.

Since April 2018, rental properties with an Energy Performance Certificate (EPC) rating of F or G have fallen below regulatory standards, and must be improved to meet level E or higher before the tenancy is renewed or a new let arranged.

David Smith, policy director at the Residential Landlords Association (RLA), explains: “The rules have been introduced by the government as part of its commitments to reduce carbon dioxide emissions, reduce fuel poverty and improve property standards.”

But do the new rules – which from April 2020 will apply to all tenancies, including those with pre-existing contracts – give tenants a fairer deal, potentially lowering energy bills and ensuring a base-level standard of accommodation – or will the resulting financial pressure on private rented sector (PRS) landlords shrink the market, making it harder, and more expensive, to find somewhere to live?

David Cox, CEO of professional body ARLA Propertymark, believes the regulation “ensures tenants have better-quality and better-insulated homes, as every buy-to-let will be minimum EPC rated”. Mortgage broker Jeni Browne, meanwhile, says both tenants and landlords will benefit.

“F- and G-rated properties waste energy and impose unnecessary costs on tenants,” she says. “Requiring rented properties to have EPC ratings of A to E will improve the property’s energy efficiency, reduce longer-term maintenance costs, impose less financial burden and be more attractive to renters.”

Getting advice

However, many rental properties have yet to be brought up to spec.

“There are thousands of landlords who weren’t ready for the April 2018 deadline,” says Cox. “While the number of properties which are EPC rated F or G has fallen dramatically, from 700,000 in 2012 to less than 300,000, many landlords are yet to prepare their properties for the new law.”

Fines of up to £5,000 may be imposed on landlords whose properties fail to meet the new EPC rating, although in some cases, those unable to upgrade their properties can appeal.

To ensure compliance, landlords need to know the current rating of their property, available on the EPC Register. “The EPC Register includes all the changes you could make to the property and the rating these changes would bring to your property,” says Rose Jinks at Just Landlords.

Professional advice is also available. “Landlords can get an accredited domestic energy assessor to advise on what action to take to bring the property up to standard, make the necessary upgrades and then reapply for a new certificate,” says Browne. Common improvements include increasing insulation, installing a new boiler or swapping out existing lightbulbs for LEDs.

And it’s not just those whose properties fall into the F and G bands who should take action. The government has made clear its “long-term aspiration” is to raise the minimum property energy rating to band C by the end of the next decade.

Raising standards

Smith says: “Against this background, it’s recommended that landlords whose premises are below a band C make energy improvements when undertaking major refurbishment. Those with band E premises should carry out cost-effective and less disruptive works as soon as they can.”

If a landlord has exhausted all funding opportunities and is unable to do the works, they must apply for an exemption using the PRS Exemptions Register. Funding exemptions will not be indefinite, however, and in November the government announced it was proposing a cap of £3,500, with landlords expected to contribute up to that sum to improve their properties.

Only where the necessary improvements cost more than this amount will landlords be able to apply for a high-cost exemption allowing them to leave their properties in their existing state. So those landlords who cannot show that the cost of bringing their property up to a band-E level exceeds £3,500 will have to foot the bill themselves. This cap is expected to come into effect later in 2019.

In its response to the Business, Energy & Industrial Strategy Committee’s current inquiry into the government’s energy efficiency policy, ARLA Propertymark says: “We do not agree with the government’s decision to require landlords to contribute up to £3,500 per property to make energy efficiency improvements to ensure that the home is a minimum of EPC E.

“In many parts of the country, £3,500 equates to around seven months’ rent. Leveraged landlords (those with a mortgage) will find it very difficult to find this sum of money when average net profits for the sector are around 2% to 3%.”

No tax breaks

Meanwhile, the RLA has been unsuccessful in its attempts to lobby policymakers to make the cost of landlords’ energy-efficiency improvements tax deductible.

Smith says: “The RLA produced recommendations for the 2018 Budget, which were not approved, that any work a landlord carries out that is recommended on an Energy Performance Certificate should be tax deductible.

“It is bizarre that, for example, replacing a broken boiler is classed as a tax-deductible repair, but this is not the case if a landlord wants to replace an old boiler with one that is more energy efficient.”

The regulations may also make buy-to-let financing more arduous. “Lenders are rejecting any buy-to-let mortgage or remortgage application if the property isn’t compliant with the new rules,” says Browne. “Outside of a landlord applying for finance, if a lender were to discover that a property was not in compliance with the EPC rules – and therefore in breach of the mortgage – and if the landlord was unable to meet the requirements, the lender would be entitled to enforce repayment of the loan.”

Priced out of the market?

For some properties, major improvements will be needed in order to meet the new energy standards. While these could prove costly, in the long run they could increase a property’s value.

“Larger works may cost several thousand pounds, but while measures such as fitting double-glazed windows may be expensive, landlords should see energy-efficiency improvements as a long-term investment, which will make their property more attractive to new tenants in the long term and hopefully keep reliable tenants in the property for longer,” says Jinks.

But in trying to ensure rental property is habitable and cost-efficient, the government may actually be pricing some landlords and tenants out of the market. Cox describes the new rules as “another kick in the teeth for hard-working landlords and tenants looking to find affordable accommodation”.

Meanwhile, Smith adds: “Having well-insulated, energy-efficient homes is in the best interests of both the landlord and the tenant, but coming on top of recent tax hikes from the Treasury, there are concerns costs could be passed on to tenants in the form of increased rents.

Browne, though, remains positive. “Ensuring properties meet modern-day living standards is not only good for the tenant; the regulations help landlords to protect their investment too,” she says.