PRS energy efficiency regulations briefing - Sept 2017

The legislation

The coalition government introduced minimum energy performance standards in the worst private rented properties in England and Wales in 2011 which come into force from next year.[1] From April 2018, landlords should not be able to rent out properties with energy efficiency ratings below EPC band E (the worst properties), however, critically a wide set of exemptions apply. There is now an urgent need to provide clarity on how landlords will be required to meet these requirements or make the UK government remove these ‘get outs’.  

Several organisations working on the issue strongly disputed the need for the caveats and exemptions within the current regulations and argued that all properties within scope of the regulations should be required to meet a minimum standard of EPC band E, up to a maximum cost limit.

Key loopholes

  1. The current regulations specify that properties don’t need to be brought up to the E standard if this presents a cost to landlords and rely on there being adequate energy efficiency policies which can fund the measures instead. Following the demise of the Green Deal, [2] the Green Deal Home Improvement Fund [3] and the Landlord Energy Saving Allowance [4] there is now a fear landlords will use the lack of funding as a reason not to invest in their potentially life-threatening properties. [5]

  2. Astonishingly, houses of multiple occupancy (HMO) properties will also not be fully covered by national standards for PRS [6] despite a recent NEA survey which highlighted the worst of these rental properties have such inadequate heating and insulation that it is impossible to keep them warm and free from damp.

Additionally, landlords are able to unilaterally claim exemptions using an online form. The submission of evidence is explicitly optional [7] - instead only a ‘self-certified narrative explanation’ is requested. This means that confirming whether exemptions are indeed valid is incumbent on local authorities after the fact, something that increasingly over-burdened councils are at risk of not being able fully undertake. As such, exemptions are clearly open to abuse and a real risk exists that many vulnerable tenants will not have properties brought up to legal standards.

A cost cap is needed to close the cold homes loophole

The previous Secretary of State, Amber Rudd and her officials in the Department for Energy and Climate Change (Decc), previously recognised that the regulations needed to be amended to enable them to work more effectively. She therefore proposed that the regulations be amended to require landlords to make the improvements subject to a proposed cost cap. We and others warmly welcomed the proposal and yet, with the creation of BEIS, there has been a long delay and no consultation has yet been released. There is therefore a need for urgent changes in the private rented sector as the current energy efficiency requirements for the PRS for 2018 are not fit for purpose and need to be adapted urgently due to the short-timeframe until landlords need to comply.

The government may argue that the recent revival of the Green Deal scheme after its sale to the private sector - now offered by the Green Deal Finance Company - means that landlords do in fact have access to financing, and are therefore unable to exempt themselves from meeting new standards. However, there are several problems with the privatised Green Deal scheme that bring this into question:

  1. The privatised Green Deal scheme is only applicable to heating systems (e.g. a new boiler). Therefore it is irrelevant to any property where the improvements needed to reach band E are insulation based.

  2. The Green Deal requires the tenant’s permission to be accessed. The complexity of the scheme and the fact that tenants are liable for repayments (and can be legally cut off from their energy supplier for failure to pay) may mean that tenants opt to forgo improvements. The relative power dynamic of landlords and vulnerable tenants also means that the requirement for the tenant’s permission could be exploited by landlords wishing to exempt themselves.

  3. The government’s own impact analysis [8] shows that 27% of F & G rated properties would not meet the Green Deal’s ‘golden rule’ criteria to be eligible for financing, and so would be ruled out immediately. That does not imply that the remaining 73% could be addressed via the Green Deal, for example because of the heating system limitation addressed above.

There are further downsides for tenants in using the private Green Deal financing mechanism to upgrade F & G band properties as opposed to a landlord cost cap:

  1. A Green Deal arrangement limits the choice of tenants (and subsequent tenants for the length of the loan repayment) wishing to switch energy suppliers.

  2. Ultimately the tenant is paying to increase the value of the landlord’s property - a further transfer of wealth from tenant to landlord above and beyond the rental agreement - in order for legal requirements on the landlord regarding housing standards to be met. This fails a common sense fairness test.

Finally, urgent attention must also be brought to including houses of multiple occupancy (HMO) rented properties in the relevant regulations. Currently they fall completely outside even the inadequate measures described above for the rest of the rental sector.

Impacts

Privately rented homes (such as poorly converted flats and shared properties such as bedsits and hostels) are still causing the greatest hardship and the most acute risks for their residents.[9] 35% of all fuel poor households in England are in this tenure, over 850,000 households.

In England there are 212,594 private rented properties in EPC band F and 85,406 in band G.[10] Welsh data is less recent, but official extrapolation shows 14,000 properties in bands F and G.[11]

The government’s own estimates [12] show that the annual bills savings for a band G household moving to band E would be £990/yr. For a band F household it would be £510/yr.

This means that if all landlords able to exempt themselves from minimum energy efficiency standard regulations did so, the estimated total cost to private tenants over five years (the length of exemptions granted under the regulations) would be just over £1bn (£1,017,374,400).[13

As F & G band properties represent the worst in the UK housing stock, inhabitants are a particularly vulnerable social group. Thus the cold homes loophole puts the short term interests of private landlords already profiting from their tenants above the long term interests of some of the most vulnerable tenants in the country.

Impact of a cost cap on private landlords

Research shows that the average capital cost of upgrading an F or G band property to band E is £1,421 per property.[14] Thus the estimated total cost to private landlords to implement improvements across all band F and G properties would be £440m (£440,544,000).[15] More than 70% of such properties could be brought up to Band E for less than £1,000. Critically, none of the 3,000 properties surveyed required external wall insulation to reach Band E.

Thus, the total cost to private landlords to bring properties up to band E is less than half the avoidable cost in high bills that vulnerable tenants can expect to pay over the next five years


Footnotes

1. From April 2018, landlords will not be able to rent out properties with energy efficiency ratings below EPC Band E (exemptions apply). The regulations apply to the domestic private rented sector in England and Wales. This is defined in section 42 of the Energy Act 2011 as properties let under an assured tenancy for the purposes of the Housing Act 1988, or a tenancy which is a regulated tenancy for the purposes of the Rent Act 1977. A high percentage of fuel poor households also live in the worst properties in the deepest fuel poverty are renting from private landlords, they must be prioritised for assistance.

2. On the 23 July 2015, the UK Government announced there will be no further funding to the Green Deal Finance Company due to low take-up and concerns about industry standards.

3. Through the Green Deal Home Improvement Fund (GDHIF) up to £5,600 was available to households in England and Wales to help with the cost of installing certain energy saving measures such as solid wall insulation, double glazing, boilers, cavity wall and floor insulation

4. The Landlord’s Energy Saving Allowance (LESA) was ended in April 2015 it provided a tax allowance of up to £1,500 per dwelling if the landlord installed certain energy-saving items.

5. NEA and others have also been pushing for urgent changes in the private rented sector as the current energy efficiency requirements for the PRS for 2018 are not fit for purpose and need to be adapted urgently due to the short-timeframe until landlords need to comply. The previous Secretary of State, Amber Rudd and her officials in the Department for Energy and Climate Change (DECC), previously recognised that the regulations needed to be amended to enable them to work more effectively. She therefore proposed that the regulations be amended to require landlords to make the improvements subject to a proposed cost cap. We warmly welcomed the proposal and yet, with the creation of BEIS, there has been a long delay and no consultation has yet been released.

6. The regulations apply to the domestic private rented sector in England and Wales. This is defined in section 42 of the Energy Act 2011 as properties let under an assured tenancy for the purposes of the Housing Act 1988, or a tenancy which is a regulated tenancy for the purposes of the Rent Act 1977.

7. Domestic Private Rented Landlord Guidance.

8. Final Stage Impact Assessment for the Private Rented Sector Regulations.

9. Fuel Poverty and Houses in Multiple Occupation, produced by Future Climate and National Energy Action, 2016.

10. English Housing Survey 2015 to 2016: headline report

11. Dwelling stock estimates for Wales, 2014-15

12. Energy: Private Rented Housing, written question - 8878

13. Assuming Welsh properties under band E are equally divided into ‘F’ and ‘G’ bands, and that savings for Welsh households would be the same as English households. Not including Welsh properties gives an estimated total cost to tenants over five years of £964,874,400.

14. Analysis for WWF and UK-GBC: achieving minimum EPC standards in housing

15. Cost per property multiplied by number of properties in bands F & G across England and Wales.