Energy Performance Certificates in buildings: call for evidence

 

Submission from the National Landlords Association

 

19 October 2018

 

The National Landlords Association (NLA) is the UK’s leading organisation for private-residential landlords, with 40,000 landlord members, ranging from full-time landlords with large property portfolios to those with just a single letting. NLA membership helps landlords make a success of their lettings business by providing a wide range of information, advice and services. The NLA campaigns for the legitimate interests of landlords by seeking to influence decision-makers at all levels of government and by making landlords’ collective voice heard in the media. It seeks to raise standards in the private-rented sector while aiming to ensure that landlords are aware of their statutory rights and responsibilities.

Please find below our evidence with regard to the use of EPCs in the private rented sector.

If you have any questions about this submission, please contact Meera Chindooroy, Policy and Public Affairs Manager, at policy@landlords.org.uk.

 

Response to questions

 

4. What evidence do you have relating to the reliability of EPC assessments? Do you have any information on how reliability varies across different properties, and/or the likely sources of variation in assessments? It would be helpful to indicate how recent this is.

 

With a wide range of assessors, we have heard anecdotal evidence from our members that there is variation between the providers of assessments, the use of standardised software for assessment is intended to minimise variation, but the rdSAP method is only as reliable as the data input. For example, if the assessment takes place without the homeowner present, since the assessor will consider only the visible criteria or the condition of the property according to its plans leading to potential omissions. This means that for instance if cavity wall insulation was added, this may not be considered unless the homeowner is able to confirm it has been installed.

 

The recommendations arising from the EPC assessments also do not take into account the particular circumstances of the property. For example, photo-voltaic cells (PV) would only be an appropriate addition with a south-facing roof; external cladding would not be approved in a conservation area.

 

9. What evidence do you have on how frequently people are likely to make updates to their properties which would change the EPC score?

 

Anecdotal evidence from our members suggests that landlords are unlikely to make updates to their properties unless there is a business benefit for them in doing so, or periodic renewal is required. We have advocated to the Treasury that there should be a reintroduction of the Landlords Energy Saving Allowance (LESA), to encourage landlords to make improvements which would change their EPC score (please see the response to question 13 below).

 

10. Which of the suggestions provided above do you think would be effective in ensuring that the information on EPCs is up to date? Do you have any other suggestions for ensuring EPCs remain up to date? Please provide reasoning and any evidence you have to support your response.

 

One option is providing EPCs with a ‘period of cover’, so that landlords could have their property reassessed when improvements are made, at no extra cost. The current cost of an EPC is relatively low, dependent on the size of the property, but given EPCs are valid for 10 years, if landlords already have an E rating or above, there is no incentive for them to re-assess the property.

 

In terms of changing the length of the validity of the EPC, it would be disproportionate to inspect properties every year, since little significant change is likely to happen. A change to a five-year validity could be workable and may encourage landlords to make changes during void periods between tenancies – although the effective doubling of compliance costs would be problematic for those responsible for carrying out the checks. This should be assessed relative to the benefit of changing the requirement. One positive outcome would be to bring the validity of the EPC in line with the length of many exemptions.

 

11. Would you support introducing new EPC trigger points at any of the stages listed above (or any other stages)? What evidence do you have relating to the advantages and disadvantages of any of these trigger points?

 

With regard to HMOs, when individual rooms are let within an HMO, the landlord is responsible for paying for the energy bills and will seek to recoup this through the rent charged to the tenant. It would be disproportionate and ineffective to require each individual room to have a separate EPC, as well as difficult to administer given there are shared amenities with other tenants.

 

While an EPC provides an indication of the potential energy efficiency of the property, this depends on the way in which the property is used by its residents. An EPC could therefore provide a false sense to an HMO tenant who is sharing with others on separate tenancy agreements, and who may not utilise the property in an energy efficient way.

 

13. Which of the suggestions provided above do you think would be effective in encouraging building owners to make appropriate energy performance improvements to their property? Do you have any other suggestions? Please provide reasoning and any evidence you have to support your response.

 

We have two suggestions – a reintroduction of tax relief for energy efficiency improvements, and tax relief at the point of sale for higher rated properties, for example through capital gains tax or stamp duty.

 

Currently, landlords are exempt from minimum energy efficiency standards if they are not able to make improvements at no-cost e.g. through the use of funding. With the ending of the Green Deal, this has become harder for landlords to access, and the proposed cost-cap has not yet come into force.

 

LESA encouraged landlords to invest in energy efficiency improvements by permitting them to offset up to £1,500 per dwelling against income tax or corporation tax for installing efficiency measures. The actual take-up of LESA by landlords was low; the Energy Saving Trust estimates that roughly 18,000 landlords took up the offer over its lifetime.  HMRC estimated that the cost of the scheme was quite small, at around £5m per year (doubling to £10m in 2013/14 and 2014/15).  This was largely due to landlords having had little incentive to make energy efficiency improvements (as it is tenants who benefit from fuel bill savings). In addition, the allowance was poorly promoted to both landlords and their accountants.

 

The context has now changed. Landlords need to reach a minimum EPC rating of E by 2020, and therefore there will be an increase in the number of landlords seeking to make improvements to their properties. The advantage of a tax allowance such as LESA is that it explicitly leverages private sector finance, in the form of landlords investing in their properties. This in turn ensures an economic multiplier, firstly through private sector investment, and secondly through the wider economic benefit that comes from tenants spending less on imported energy and more on local goods and services.

 

The reintroduction of LESA could, if not restricted to those properties with an EPC rating of F or G, see further improvements in the whole of the PRS stock. The Government has already set out an ambition to see every property achieve a C rating by 2030. Allowing all landlords to take advantage of LESA could see tenants across the whole sector benefiting from warmer homes now, instead of waiting five or more years for further regulations.

 

For landlords, the incentive to improve their property differs. For those letting single tenancies, the benefit of any energy savings accrues to the tenant, who is responsible for paying the utility bills. Our research shows that tenants do not consider the energy efficiency of a property as a priority when choosing where to rent (see question 15).

 

For landlords of houses in multiple occupation (HMOs) which are let as individual rooms, they are often liable for the energy bills, and therefore they may have an interest in ensuring the property is more energy efficient.

Furthermore, introducing a financial benefit for those selling properties would incentivise landlords to invest in improvements for which they would see a return at a later date. This could be in the form of capital gains tax relief, or stamp duty relief. It would also incentivise property owners to have an up-to-date EPC and would encourage compliance with the requirement to provide an EPC in advertising.

 

15. What evidence do you have on how useful the EPC rating and cost information are to consumers when purchasing or renting a property? Are consumers using information on the EPC to negotiate property prices or rents?

 

Our survey of private tenants in June 2017 asked: ‘Did you consider the energy efficiency of your home when deciding to live there?’.

 

The majority (64.2%) responded no – either it was not at all important (22.1%) or there were more important factors (42.1%). A further 6.3% could not recall whether or not they did, suggesting it was not a key factor in their decision making. Only 7.0% said it was an important factor in deciding where to live.

 

16. Do you have any evidence on consumers’ understanding of the energy efficiency rating used in EPCs? Do you think a different rating such as carbon emissions or primary energy would have a better impact for consumers?

 

For landlords, as the direct consumer, the EPC provides little direct value. While it measures the potential energy efficiency of the property, the benefit of this usually accrues to the tenant rather than the landlord, as the tenant is responsible for paying energy bills.

 

However, the property’s EPC rating is only an indication; if the tenant uses the property in a way which does not maximise energy efficiency, their fuel bills may still be high. For example, tenants may open windows rather than utilising ventilation options, or may not know how to use energy efficient measures they are unfamiliar with, such as heat pumps. A landlord may fit LED lighting, which the tenant is then responsible for replacing if a bulb blows. The tenant may choose not to replace like-for-like given the upfront expense of an LED lightbulb versus a less energy efficient alternative.

 

The value of the EPC is therefore dependent on the ‘end-user’ understanding of how to live in the property while minimising their energy usage.

 

19. Which of the suggestions provided above do you think would improve the ability of building owners and other stakeholders to make effective use of EPC data? Do you have any other suggestions? Please provide reasoning and any evidence you have to support your response.

 

It’s unclear what the benefit to landlords would be of access to greater EPC data. Whilst there may be some time saved in the assessment or with receiving quotes for changes needed, the frequency of needing these is limited and therefore the saving would depend on the size of the landlord’s portfolio.

 

There would be benefits in storing data collected during EPC surveys; this could reduce the cost of future assessments and enable more frequent assessment.

 

20. How useful do you think a ‘data warehouse’, ‘building log book’ and/or ‘green building passport’ would be in increasing take up of energy efficiency improvements or supporting existing initiatives? What kinds of data might usefully be included in addition to EPC data and how could these proposals best be implemented? How might more comprehensive assessments be encouraged without making them a requirement for homeowners?

 

A data warehouse, building log book or green building passport may be helpful to landlords in identifying the measures they can undertake as well as providing more consistency in identifying measures that have been undertaken by previous owners. However a significant increase in the cost (given the example of the green passport in Germany costing €450) would be a large disincentive, particularly where there is no direct benefit to the landlord. If this was subsidised, as in Germany, landlords may be more amenable to adopting the passport, but the benefit for them would have to be clearly stated.

 

21. What evidence do you have on compliance with the requirement for providing an EPC when purchasing/letting a property, or the requirement to display the EPC rating in property listings. Does this differ by tenure type or by any other subset of the building stock? What evidence do you have on the reasons for lack of compliance with the requirement for an EPC?

 

Our Q3 2018 landlords panel asked, ‘do any of your rental properties have an EPC rating of E, F or G?’ (base: 690 landlords). Only 5% of respondents didn’t know the EPC rating of their property. This suggests a significantly higher level of compliance than is set out in the call for evidence. It’s important to also remember that not all properties would require an EPC, and so an answer of ‘don’t know’ doesn’t necessarily indicate a lack of compliance. However, assuming that some proportion of that 5% require an EPC but do not have one, we can consider variation across the sector by considering the proportion responding ‘I don’t know the EPC rating of my property/ies’.

 

By portfolio size:

  • Portfolio of up to 10 properties – 5%
  • Portfolio of 11 or more properties – 3%

By tenant group:

  • LHA – 3%
  • Students – 6%
  • Other benefit claimants – 4%
  • Young singles – 4%
  • Young couples – 6%
  • Families with children – 3%
  • Older couples – 5%
  • Retired – 3%
  • Blue collar workers – 4%
  • White collar workers – 3%
  • Executive / company lets – 3%
  • Migrant workers – 2%
  • Older singles – 5%

By operating area:

  • East of England – 3%
  • East Midlands – 2%
  • London (central) – 4%
  • London (outer) – 8%
  • North East – 4%
  • North West – 5%
  • Scotland – 14%
  • South East – 4%
  • South West – 7%
  • Wales – nil
  • West Midlands – 5%
  • Yorkshire – 5%
  • Northern Ireland – insufficient data

By type of property:

  • Flats (individual units in a block) – 5%
  • Flats (a block of individual units) – 9%
  • House (detached) – 4%
  • House (semi-detached) – 3%
  • House (terraced) – 4%
  • Bungalow – 7%
  • HMO – 2%
  • Other – 12%.

 

22. What evidence do you have on what enforcement work is currently being done to ensure that EPCs are being produced?

 

We work with landlords across the country and have seen little evidence of enforcement by local authorities on this issue. The level of enforcement in the private rented sector is a concern across a number of areas and there is often a lack of resource commitment at a local level, as well as wide variation across local authorities. We have not experienced a local authority which has placed priority on the enforcement of EPCs, particularly given other areas of interest for them, such as criminal activity, overcrowding and poor property condition.

We would also agree with the position laid out in the call for evidence paper, citing a disconnect in two-tier local authorities between the responsibilities of trading standards and those of the housing or environmental protection officers. A more streamlined approach would make it clearer for landlords and for tenants, as well as supporting a more straightforward enforcement route.

 

The lack of compliance with EPCs often relates to smaller letting agents who operate without oversight and appear and disappear relatively quickly. This requires a proactive approach to sanction those agents who do not comply with the regulations around advertising.

 

23. Which of the suggestions provided above do you think would be effective in improving compliance with the requirement for an EPC, bearing in mind the other changes to EPCs being considered. Do you have any other suggestions? Please provide reasoning and any evidence you have to support your response.

 

We asked our members about their awareness of the minimum energy efficiency standards. Of the landlords surveyed, 91% were aware of the change in regulations, with 82% saying they were aware and fully understood the details. While this cannot be extrapolated across all landlords, it suggests that those who are engaged with trade associations are highly likely to understand what they need to do to comply with the law.

 

We also asked members what they would do if their rental property did not meet the minimum standard, given they could incur a fine of up to £5000 for non-compliance. Of those surveyed, overall, 85% would carry out works to bring the property up to standard.

  • 46% would carry out the works that maximise the long term value of their property, and continue to let it
  • 36% would carry out works at the minimum cost required to comply, and continue to let it out
  • 5% would not carry out any works and either sell the property or not re-let it
  • 3% would carry works out to bring it up to standard and then sell it
  • 1% would not carry out any works, and continue to let it out
  • 3% responded ‘other’
  • 5% didn’t know what action they would take.

 

This suggests that landlords will seek to comply with the regulations. As discussed under question 22, it’s important that any enforcement is effective to encourage landlords to take action.

 

24. What evidence do you have on costs of EPCs, how easy it is to procure an EPC or on consumer attitudes about EPC costs?

 

The current cost of EPCs does not appear to be a concern for our members. It is relatively cheap to procure an EPC and with a 10-year validity, the cost averaged out over this period is low. We have a significant number of members contacting us asking for help in finding an EPC assessor. One of our recognised suppliers is The EPC Man (http://www.theepcman.co.uk/), which acts as a network so that landlords can find an accredited assessor in their area.

 

25. Which of the suggestions provided above do you think would be effective making the process of procuring EPCs easier or more affordable, bearing in mind the other changes to EPCs being considered. Do you have any other suggestions? Please provide reasoning and any evidence you have to support your response.

 

Supporting EPC assessors to use previous survey data and additional data sets could reduce the cost of the assessment, although depending on the length of time between assessments, there may be significant changes to the property which would affect its rating.

 

Our Q2 2018 landlords panel found that 85% of landlords surveyed said that all of their properties are currently rated EPC E or above, with 9% of landlords needing to make some improvements, 1% who qualified for exemptions, 4% who didn’t know if they needed to make changes and 1% who were unaware of the incoming regulations.

 

The proportion who needed to make changes to a proportion of their properties was higher the greater number of properties a landlord had, with the vast majority of those needing to upgrade less than a quarter of their portfolio:

  • Portfolio size: Up to 10 properties – 7%
  • Portfolio size: 11-19 properties – 12%
  • Portfolio size: 20 plus properties – 27%.

 

According to the 2016 English Housing Survey, published this year, property in the private rented sector is likely to be older than in other tenures, with a third (35%) built before 1919 compared with 21% of owner occupied and 7% of social rented homes. This would require a higher level of upgrade, or may be subject to more exemptions – emphasising the need to provide support to landlords to install energy efficiency measures.

 

26. This Call for Evidence has outlined a number of options for making improvements to EPCs. Of the suggestions discussed in this document or which you have put forward, is there one or more you think is particularly important, or are there any other suggestions you have or comments you want to make about EPCs?

 

Landlords can currently deduct the cost of an EPC from their taxable income – as an essential business cost – but not on the cost of energy efficiency measures. Spending on many energy efficiency measures is considered capital expenditure, and as such not redeemable in the short-to-medium term. The incentive for installing the measures also usually sits with the tenant, as they benefit from lower fuel bills. If EPCs are to be effective, and if the Government wants to reach its 2030 targets, reintroducing a form of revenue tax relief such as LESA would incentivise landlords, as would attaching a financial benefit to selling a property with a higher EPC rating, as outlined under question 13.