It is hardly a surprise that, yet again, 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 controversy is yet to be implemented) or indeed the change in stamp duty back in 2016, this one has gone widely unnoticed but has equally serious consequences if compliance is not followed. Uniquely this one, unlike the others, will affect property owners directly: As of the 1st of April 2018, any property let under a new tenancy (tenancy not tenant – explained later) will have to have an EPC rating of E or below. Firstly, you may ask what is an EPC? Indeed this article is a direct result of speaking to people who were unclear regarding this. Equally, you might ask why E and not A, B, C or D?
To answer the first point, an EPC is an Energy Performance Certificate and like many such things they started of as a good idea in principle and then, after the usual interactions of legislation, they end up being little more than a stealth tax with a fancy name. To shed some light on its evolution; they came in to effect 10 years ago and as such were hailed as the next big thing in terms of proving at point of purchase that the proud possessor of said certificate could use it to prove the saleability of their property over the next poor seller, whose house possessed an EPC which started with an equally arbitrary letter of the alphabet. Since then, however, as a letting agent they have become quite useful. The reason for their newfound use is that energy, like house prices and the cost of renting, has increased in a manner that none of us in 2008 would have dreamt. This in turn has led to a far more diligent breed of tenants who, in their selection of property, 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. Because of this they are keen to save every penny they can after the rent is paid in the hope of maybe, eventually, buying for themselves. The second point 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 effect 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! Its the tenancy, not the tenant, or indeed the tenant’s happiness, that is the change in this dynamic that causes the need. So, if renewed to the same tenant every year, then this will affect the landlord as it is a new tenancy every year and means the property needs to comply with the minimum ratings. A landlord might also assume that its not a need for worry as they have had a tenant for a few years and the terms are just about to run out, so they won’t renew the tenancy and let it become periodic therefore not issuing a new tenancy. Well sadly that too counts – If the tenancy has ended or is ending its fixed period and stops being an AST and starts being a Periodic that lawfully is a change of tenancy and the landlord must comply with the need. 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 same date in 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 paid by landlords.
How will landlords get caught out? Two key facts about EPC’S is 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 rent 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 £4000 and, if a property was an E when it was rated last, that does not necessarily mean it will be E when renewed (or at least so I am led to believe). 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)! Irrespective of the close link that this tenant had with the governing authority that lead to this advice and the costly end to the story, the point is the information is only a click away for tenants and that tenants now must be considered as more than the sum of their parts – the authority will support them as this means income from fines and houses released back to the market for that authority.
It is not all doom and gloom though and, of course, it does come with opportunity. Most property will be E or above anyway! With regard this point, Landlords, don’t look at this change as another that will eat into profit. It is an opportunity to take stock and to reinvest in and further protect holdings or simply to shed the investment in favour of new opportunities. Only that particular landlord and their financial planning team can answer which is best for them, but time should be taken to talk to an EPC specialist and agents. 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 rent out and will eventually sell and look at the transaction as a money over stress equation although I appreciate there are exceptions to this rule, this is the majority. If you are a landlord and you have made these changes prior to the investment reaching its life time needs and/or its point of sale and effectively have offset these expenses as you’ve gone along, those buyers interested in what you offer won’t be offering £20,000 below asking price because it needs renovating but will be more in line with reasonable sale prices achieved by vendors who have made homes out of houses and invested for their own wellbeing.
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 realising 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.
This articles was kindly provided by Liam Jones, Head of lettings, Alistair Redhouse