The Government's plan to make rented homes greener is causing concern and confusion among landlords.
It wants to to enforce a compulsory energy performance certificate rating of 'C' on new tenancies by December 2025, and on all rented properties by December 2028.
However, This is Money reported last seek that one third of landlords were 'not confident' they would be able to get their properties up to code.
Upgrades: If passed, a bill currently going through parliament could force many landlords to spend money improving the energy efficiency of their properties
There were scores of different reasons for this. Some said they were not able to afford the required improvements which include things like replacing gas boilers, improving insulation and changing the windows and doors.
Others did not want to evict tenants in order to carry the works out, and some thought they would struggle to make any return on their investment.
Many, too, were reluctant to start making preparations because they felt the Government had not made clear exactly what would be required of them and they did not want to waste time and money on improvements until they had more information.
Landlords contacted us in their droves with questions about what they needed to do, what the costs might be and how and when the EPC rating rules might be enforced.
While many of the details around the rule change are still unknown, we enlisted the help of buy-to-let experts Angus Stewart, chief executive at specialist buy-to-let mortgage broker Property Master; Saurabh Saxena, founder and chief executive of buy-to-let trading platform Houzen; and Jonathan Rhodes, head of commercial valuation at property consultancy Cluttons to try and answer some of them.
Is the EPC 'C' requirement set in stone?
The changes being talked about are part of the Minimum Energy Performance of Buildings Bill, which is currently making its way through parliament and is not yet enshrined in law.
The bill will be debated in the House of Commons and House of Lords over the coming months, during which time its contents could be altered.
At the end of this process, the final bill will go to a vote which will decide whether it becomes law.
At the moment, the section that relates to landlords reads as follows:
Given the Government's very public target for the UK to reach net zero carbon emissions by 2050, experts think it likely that the changes will be voted through.
Stewart says: 'Given the Government's very public commitment to net zero by 2050 and with COP 26 being hosted in Glasgow later this year, it is looking as if it is all systems go on the new EPC regulations for landlords.
'The bill to bring it about is now wending its way through parliament and has a lot of backing.
'The Government sees improving energy efficiency in British homes as key to meeting its net zero target.'
Homes were responsible for 15 per cent of the UK's greenhouse gas emissions in 2019, according to the latest available figures from the Department for Business, Energy and Industrial Strategy.
Will there be financial support for upgrades?
The Government has a lot of political capital invested in the UK meeting its green targets so it could decide to offer some form of financial support to landlords, perhaps in the form of grants or low-cost loans.
'There have been various comments by government ministers that there might be some help to make the green transition, but it all sounds very vague at the moment, and nothing has been said specifically about helping landlords,' says Stewart.
It already tried to do this with the Green Homes Grant, which was available to landlords as well as homeowners but the scheme was short-lived due to administrative issues.
Replacing a gas boiler with a more sustainable alternative is just one of the ways that a property's EPC rating might be improved
It has been rumoured that a successor scheme to the Green Homes Grant will be launched in due course. This follows the example set by other countries.
'In the US, Biden's administration has chalked out a massive infrastructure bill, which will support real estate retrofitting in a pretty large way,' says Saxena.
'Boris Johnson tried to release a similar package last year with the Green Homes Grants.
'However, the grants were not best executed and perhaps weren't well-resourced by a strong admin team during the difficult Covid period, hence the scheme had mixed reviews from homeowners.'
Borrowing from a mortgage lender may offer another solution
Another way that the Government can influence the green transition is by incentivising mortgage lenders to offer cheap finance for landlords that want to carry out green home improvements.
The Minimum Energy Performance of Buildings Bill, if passed, would require individual lenders to achieve an average EPC rating of 'C' across all of the properties on their books by the end of 2030.
This means they may offer preferential rates on 'further advance' products for green retrofits in order to get their average up. Further advances are additional loans secured on a home, for the purpose of making improvements.
We are already seeing some evidence of this, with several banks offering 'green further advance' products with competitive interest rates.
They are also offering higher loan-to-value ratios or lower interest rates to those who already have 'A' or 'B' EPC ratings.
Rhodes says lenders could help to finance energy efficiency improvements if the government did not step up.
'In the absence of central and local government enforcement and any meaningful incentivisation, we believe that lenders could hold the key.
'By working with landlords to support them in their drive for EPC compliance, to favourable lending criteria for greener buildings, the banks can be both the carrot and the stick to a successful private sector drive for greater energy efficiency,' he says.
Will there be any exemptions?
One of the most common complaints about the proposed EPC 'C' requirement is that it penalises landlords who own period properties.
These will often be more expensive to retrofit, and will be much more difficult, in some cases even impossible, to bring up to code.
Costly: Owners of older homes are likely to pay more for green improvements
The bill in its current form says the landlords may not be forced to upgrade their properties 'if they meet the criteria for an affordability exemption'.
It says the criteria would be defined in regulations by the secretary of state for Business, Energy and Industrial Strategy and that has not yet happened, so we do not know what kind of privately rented homes might qualify.
For owner-occupied properties, the bill says homeowners will be exempt if:
(a) An occupant or anyone else whose permission is needed for works needed be carried out has explicitly refused such permission;
(b) It is not technically feasible to fulfil the duty; or
(c) The cost of carrying out works to fulfil the duty would exceed £20,000.
How much will it cost and are improvements tax deductible?
The cost of any improvements depends on what work needs to be done. However, Stewart estimates that bringing a property rated 'D' or below up to a 'C' or above will cost an average of £10,000.
At present around 67 per cent of private rented properties in England and Wales are below a 'C'.
Stewart says: 'Around half of all landlords own just one property, and they are already dealing with increased taxes on private rented property and for many the continuing coronavirus crisis that has pushed some 800,000 people into rent arrears.
'For many this will be a squeeze too far on their finances and they may well choose this moment to exit the market which will reduce the number of homes for rent at a time when demand is rocketing.'
Improvements to a property to boost its EPC rating are classed as capital expenditure, rather than repairs and maintenance. This means they cannot be written off against profits for tax purposes.
Where can I find out how to reach an EPC 'C'?
The first port of call is the homes EPC certificate, which outlines what can be done to improve the property's current rating.
While the certificates are valid for 10 years, Rhodes says that, before embarking on potentially expensive upgrades, landlords should consider getting a fresh one.
If a property has had the same tenant in for some time and the EPC assessment has not been re-run, the report may be out of date due to changing assessment criteria and changes to the home's condition.
'Be mindful that many existing EPCs may be old and possibly wrong, so re-running them using better software will provide greater accuracy and will provide a more transparent picture about the real work that needs to be done in the drive to net zero,' he says.
'Landlords need to start to review existing properties now to analyse what work will be needed.
'Budgets and plans for work need to be put in place, particularly for landlords that own multiple older properties, as it could be that some of these could obtain an exemption.'
There are also plenty of online tools that can be used to give landlords an idea of potential upgrades and costings, often based on information about similar properties in the same area.
For example, Saxena says Houzen's algorithm can create a 'roadmap' to a higher EPC rating which would suggest 'specific changes to make in the home, their costs and which high-quality suppliers to use' and detail 'the impact the work would have on the valuation and rent yield, to justify the investment.'
What will the punishment be for not having a 'C' rating?
At the moment, the best guide to how the regulations might be enforced is to look at how things were handled the last time the EPC rating threshold was changed.
'In the past when the EPC was last raised to an E in 2018, local authorities were charged with enforcing breaches of the regulations,' says Stewart.
'The Government then proposed maximum fines of up to £30,000 per property.'
Were the legislation to be passed, there would probably be a transition period, and strict enforcement action against landlords may not come into play immediately.
If the bill was passed, it could still be some time before the government or councils started to take enforcement action against landlords who did not comply
Says Saxena: 'Over the next 5 years, we expect that retrofitting will become compulsory and that initially governments will incentivise it through grants, then gradually end customers will simply stop buying or renting lower EPC or sustainability rated homes.
'At this point, the Government would start officially penalising the lower rated homes. One can draw parallels to the car auto MOT regulation where cars need to constantly be checked and eventually go out of circulation.'
How can I ensure the tradespeople I hire know what they're doing, and will meet the requirements?
While the requirement to get up to an EPC 'C' is yet to be made official, some landlords may decide to start upgrading their properties ahead of time.
For those that do, using tradespeople that understand the relationship between the work done and the required uplift in energy efficiency will be vital.
Landlords are advised to choose companies that are:
- Registered as a certified installer with TrustMark
- Certified by a body that has been accredited by the United Kingdom Accreditation Service (UKAS)
- Certified to install energy efficiency measures against one of the following Publicly Available Specification (PAS) standards:
- PAS 2030:2017
- PAS 2030:2019
- PAS 2035:2019 (for park homes, high rise buildings and buildings that are both traditionally constructed and protected)
- Certified under the Microgeneration Certification Scheme (MCS) to install low-carbon heat measures such as heat pumps