WHAT ARE ENERGY PERFORMANCE CERTIFICATES AND HOW DO THEY IMPACT INVESTMENT LANDLORDS FROM APRIL 2018

May 14, 2018

 

Landlords and letting agents are facing another change in the law surrounding their investment properties:  Unlike the well-publicised changes to the tenant fee structure (that controversially is yet to be implemented) and the change in stamp duty back in 2016, this one has gone widely unnoticed. Unlike the others, it will affect property owners directly.

 

As of the 1st April 2018, any property let under a new tenancy (tenancy not tenant – explained later) has to have an EPC rating of E or below.

 

An EPC is an Energy Performance Certificate. As a letting agent they are quite useful as the cost energy, like house prices and the cost of renting, has increased dramatically over the last 10 years. This has led to a far more diligent breed of tenants who scrutinise everything in ways not previously seen, as they in turn know they will be renting for far longer than their counterparts 10 or 20 years ago. For this reason they are keen to save every penny they can after the rent is paid in the hope of maybe, eventually, buying for themselves.

 

Why E? Well - Why Not! However, the official line is to make sure that the standard of housing provided by landlords hits a minimum requirement.

 

How does this affect landlords? 

 

Firstly, it is those landlords whose investment properties are in receipt of an EPC of less than E who will need to take action. Some may be sitting at home reading this thinking, well that’s nice but I don’t need to worry about what this twit is saying or do anything because I’ve had the same tenant for years and they are happy!  It is the tenancy, not the tenant, or indeed the tenant’s happiness, that causes the need.

 

Even if you have had the same tenant for many years and think you will simply let the Assured Shorthold Tenancy (AST) become Periodic by not renewing the tenancy I regret to advise that too counts as a “change of tenancy” and the landlord must comply with the law.  

 

Also to be considered, is that if it has been Periodic for years and assuming the tenants plans are to stay for another few years, as of the 1st April 2020 all property in tenancy will have to be E, irrespective of new tenancy or not. Either way, things, sooner or later, will need attention dealt with by landlords.

 

How will landlords get caught out? Two key facts about EPC’S is that they are public information and they run out. As such I can check the status of any property from my laptop with just the postcode, I don’t even need owner permission. Regarding its running out; an EPC only lasts 10 years and is a legal requirement to let or sell. We are just verging on 10 years since the first ones were done! What this means is that this year the first of them will be coming up for renewal. The fine for none compliance is £4,000 and, if a property was an E when it was rated last, that does not necessarily mean it will be E when renewed.

 

If a property does not comply there are other potential consequence for the landlord too. If they become a known person by the local authority and branded as supplying ‘sub-standard’ property, fairly or unfairly. The question is will local governance stop with just the EPC or will they be looking at further checks on the landlord’s ability to provide safe housing?

 

A few years ago, I heard of a landlord who, against recommendation, decided to argue over a minor issue regarding his property with his tenant. His tenant’s best friend worked for the council. Of course, the advice between friends was to report the issue. The council official who visited made many recommendations on the property. These recommendations came to a total of £14,000 (if memory serves)!

 

It is not all doom and gloom though and, of course, it does come with opportunity. Most property will be E or above anyway! It is also an opportunity to take stock and to reinvest in and further protect holdings or simply to shed the investment in favour of new opportunities. Is it time to change the double glazing or fit a new boiler? This will hopefully increase the rating of the dreaded EPC but could potentially reflect in the worth of the properties sale, not to mention that, in the short term, these changes could affect a property yield by inflating the rent.

 

I, as an agent, love a fixer upper, especially one offered by a landlord who has done nothing to a property in 10 years. The reason for this is that landlords are not emotionally connected to the property they let out and they will eventually sell and look at the transaction as a money over stress equation. 

 

Most investment properties in this area (excluding Oxford’s HMOs) are one and two beds and, as such, are just as palatable to first time buyers as to investors. Decoration can be changed and is part of the excitement for a first-time buyer keen to get to completion and who, importantly, has emotionally invested in the transaction, thus making a good offer. A boiler change on the other hand scares the living daylights out of most new home owners who will run for the safety of their rented flat, which is someone else responsibility! Really then when you get to the point of releasing the capital by sale, if you think about it logically, that leaves a landlord only with other investment landlords as buyers.

 

When that landlord vendor bought the property, they wanted a deal. So too will a new landlord buyer who will offer below market rate for these perceived short falls if still present. As such, talk to your accountant regarding what will you be able to claim back as an expendable against the investment? Those changes could pay off both now and when the property is sold.

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