Wednesday, 11 February 2015

EPC Legislation Gets Tougher in 2016 & 2018

I try to avoid the nuts & bolts of lettings such as legislation changes this blog as it's not really what it's about and it doesn't particularly excite me, but occasionally there are significant changes that may affect a Sunderland Landlords current investments & will inevitably have an impact on their future investment strategy, so they need to be shared - this is one such issue

I'm quite open about my dislike of Energy Performance Certificates (EPC's), a view I have firmly held since their introduction in 2007

This is an opinion formed in part because they are wholly toothless - any recommendations made to improve the energy efficiency of a property do not have to be acted upon (so what's the point??) 

My negative feelings towards them are also due to the fact that at no point have Tenants been made sufficiently aware of them, so a Landlord is legally obliged to have one with only a very, very small chance of ever being asked by a Tenant to see one

Unfortunately part of the Energy Act 2011 means that this is all about to change...

The following are extracts are taken directly from the Department of Energy & Climate Change paper 

  • From April 2016 landlords of residential properties will not be able to unreasonably refuse requests from their tenants for consent to energy efficiency improvements, where financial support is available, such as the Green Deal and/or the Energy Company Obligation (ECO)
  • Following this, from April 2018, private rented properties must be brought up to a minimum energy efficiency rating of ‘E’. This provision will make it unlawful to rent out a house or business premise that does not reach this minimum standard.
  • This requirement is subject to there being no upfront financial cost to landlords. Therefore, landlords will have fulfilled the requirement if they have either reached “E” or carried out the maximum package of measures funded under the Green Deal and/or ECO (even if this does not take them up to an ‘E’ rating)
So...what does this mean?

In a nutshell, there are 2 strands to this

  1. From 2016 a Landlord will not be able to refuse a tenants 'reasonable request' for energy efficiency improvements
  2. From 1st April 2018 a Landlord will not be able to let an 'F' or 'G' rated property (but tenancies granted before then can continue)
It's unclear whether the law applying to Landlords being unable to refuse a tenants 'reasonable request' to improve the energy efficiency applies to just 'F' or 'G' rated properties or all properties

Despite it's good intentions and the ability to pay for improvements over time via a charge applied to the electricity bill, Green Deal is flawed in many ways, my key concern being all future Tenants are forced into honoring the deal and loan that a previous Tenant may have signed up to many years ago - and this also applies to the new owners if you decide to sell!

I doubt many Landlords will have heard of the Energy Company Obligation (ECO) but here's a link for more info - essentially it can part or fully fund insulation and boiler replacements for rented properties but only applies if your tenant meets certain qualifying conditions, and in particular are claiming Benefits or Tax Credits (but many working families get Child Tax Credits or Working Tax Credits so you may be able to qualify for ECO funding)

Click here for details

My reading of this is if you are renting to working Tenants, who are not in receipt of any qualifying benefits for ECO and if the improvements do not qualify for Green Deal then there is no way a Landlord can be forced to spend any money - that's my interpretation but I'd be keen to get the thoughts of others as I'm no expert on this!

One key word to note from all of the above is 'upfront' - Green Deal allows payments to be spread over time with a loan repaid via a charge applied the electricity bill so it is likely that a Landlord may be compelled to incur costs but they will just be spread over a few years - this will lessen the initial financial pain but will need to be factored into any yield calculations 

It must be said that once the property is tenanted the tenant pays the electricity bill so they will repay the extra Green Deal loan charges, which in theory should be no more than they will save as a result of the improvements (unless the property is a student 'bills included' tenancy where the landlord would still be responsible)

It's telling that in anticipation of this change to the law, the qualifying criteria for Green Deal appears to have been widened - it used to be like ECO that only on certain properties or tenants would qualify but now this appears to be open to a much wider group

If your tenant/property does qualify and the improvements can be fully funded then it really is a no-brainer, improving the energy efficiency of a property will make it more likely your current tenants will stay and in theory at least, it will make the property more attractive when looking to secure new tenants

If it can be part funded then you need to look closely at the numbers - one of the main selling points of Green Deal is that repayments should not exceed the efficiency savings but there's still interest attached to the loan

Of course it remains to be seen how this is implemented in 2016 and might all change depending on what happens in the General Election in May...

We'll be undertaking a review of the EPC ratings of all the properties we manage this year and advising the small number of Landlords with older properties who may be at risk of failing to meet the "E" rating so they are forewarned & can plan ahead

With all this in mind perhaps it may be worth taking a slightly closer look at the EPC before buying your next Sunderland investment property!

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