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Energy Efficiency (Private Rented Property) (England and Wales) (Amendment) Regulations 2018

Volume 796: debated on Tuesday 26 February 2019

Considered in Grand Committee

Moved by

That the Grand Committee do consider the Energy Efficiency (Private Rented Property) (England and Wales) (Amendment) Regulations 2018.

Relevant document: 10th Report from the Secondary Legislation Scrutiny Committee (Sub-Committee A)

My Lords, these regulations, laid before the House on 23 November last year, will amend the domestic minimum standard provisions within the Energy Efficiency (Private Rented Property) (England and Wales) Regulations 2015. In our clean growth strategy, we set out our ambitions to upgrade the energy efficiency of all buildings by the 2030s. The 2015 energy efficiency regulations, which set minimum energy performance targets for properties in the private rented sector, are an important precursor to that work, helping the Government to deliver our fuel poverty and decarbonisation commitments.

Although I appreciate that noble Lords may already be familiar with the minimum standards, some background on the sector and the 2015 regulations may still prove useful before we discuss the specific effect of these amendments. There are about 4.5 million privately rented homes across England and Wales, making it the second largest tenure after owner-occupation. Most of these properties already have an Energy Performance Certificate, or EPC, rating of E or above. However, about 290,000—that is 6% of the market—have a rating of F or G and, as such, are particularly energy inefficient and costly to heat. In fact, it costs about £1,000 more per year on average to heat an F or G-rated home than one rated at band D. Moreover, many tenants of these properties are among the most vulnerable and approximately 45% are in fuel poverty.

The 2015 regulations were designed to drive energy efficiency improvements to these inefficient privately rented homes and established a minimum energy efficiency standard of EPC E for these properties. Since 2018, the regulations have required landlords who let properties below the standard to improve them to EPC E before granting a new tenancy or renewing an existing one. However, the regulations also state that improvements are required only where they can be made at no cost to the landlord, using third-party funding: notably Green Deal finance. Where a home cannot be improved to EPC E, either because funding is unavailable or because of legitimate technical concerns, the regulations permit the landlord to continue to let it, provided they have registered an exemption on the new minimum standard exemptions register. However, access to no-cost funding, particularly Green Deal finance, is more constrained than was originally anticipated when the regulations were made. This means that most F and G-rated properties now qualify for an exemption.

The key amendment under discussion today addresses this by requiring landlords of domestic properties to invest their own funds in energy efficiency measures where third-party funding is insufficient or cannot be secured. To ensure that landlords are not overburdened, this investment requirement will be capped at £3,500 per property, inclusive of VAT and any third-party funding obtained. Ancillary amendments will also be made to the exemptions framework to ensure that the investment requirement delivers improvements where they are most needed.

I shall now briefly discuss the choice of £3,500 for the cap. At consultation, £2,500 was proposed, with a range of other caps presented for comparison. Following overwhelming calls, from 67% of respondents, for a higher cap, and from the results of further modelling, £3,500 was ultimately selected. Our updated modelling shows that of the caps considered in the consultation, £3,500 was the most effective at balancing the costs to landlords against the benefits to tenants and society. Specifically, that analysis shows that under a £3,500 cap: 48% of F and G properties will reach band E, with an average cost of £1,200; the remaining 52% of properties will be able to receive at least one improvement, at an average cost of £2,000; and tenants in improved properties will save an average of £180 a year on their energy bills. The £3,500 cap strikes the right balance between ensuring that a meaningful number of properties are improved to EPC E while ensuring that those improvements are affordable, particularly for smaller landlords who make up the majority of the sector.

However, I should also highlight that, alongside the clear benefits of thermal comfort for tenants, landlords themselves will benefit from the improved energy efficiency of their properties: specifically, in the form of reduced maintenance costs and increases in property capital value, as well as increased tenant satisfaction and following that, one would hope, shorter void periods.

In conclusion, these amendments will help ensure that the domestic minimum standard regulations can operate effectively in line with Parliament’s original intentions and deliver meaningful energy efficiency improvements to the least efficient homes in the private rented sector. I beg to move.

My Lords, I thank the Minister for presenting this statutory instrument. The noble Lord, Lord Grantchester, is a world expert in the new Green Deal, so I look forward to his contribution and will defer to him in all ways in this area.

First, in many cases we have had to take the Government to task for not consulting but it seems that there has been an extensive consultation in this process, which should be acknowledged.

I became a little confused when I looked back at when this was debated in the other place. I found a debate that goes back to June 2016; if noble Lords can cast their minds back that far, Andrea Leadsom was then the Secretary of State. It appears that this was debated at that time. What happened to it in between—what has been going on? The then Secretary of State refers to all sorts of dates with regard to launching the register, which have passed. Perhaps I have got terribly confused, but it seems that this is the SI that was being debated and that there has been a very long gap in between. In due course I will refer to something the Secretary of State mentioned in that debate.

As the Minister set out, this deals with some of the least satisfactory housing in the country: nearly 300,000 substandard private rented sector homes. As the Secondary Legislation Scrutiny Committee pointed out:

“The Committee is of the view that, as a significant proportion of tenants in ‘substandard’ properties are in fuel poverty”.

The committee recommends that the,

“Department may wish to monitor whether the proposals lead to any adverse impact on vulnerable tenants”,

and recommends that the department might wish to monitor how the proposals lead to the impact on vulnerable tenants and whether they become less or more fuel poor. I would welcome a response from the Minister to that recommendation.

Moving forward, the fact that we have moved from public investment into the new Green Deal to private finance providers flags up concerns—I do not know whether the noble Lord, Lord Grantchester, will go into more detail. We talk about private finance providers. Private finance initiatives in other sectors are clearly not covered in glory at the moment, so I am interested in and concerned about how those finances are regulated and registered and what level of their returns on their finance we are expecting back. What kind of cap do they have on their returns?

As the Minister set out, the key proposal here is the removal of the no-cost-to-landlord aspects of the legislation. I think that that is right, because it is quite clear that work needs to be done and it will come at a cost. The Minister highlights this as being an important element of the green agenda, and it is very clear that there are big wins to be had for relatively small investment.

Sitting suspended for a Division in the House.

As I was saying, I romped through some questions around private finance providers and details of registration control and the management of that process. I welcome the removal of the “no cost to landlords” clause and the insertion of the £3,500 cap, but there are some issues with that. I note that VAT is included within it, and so obviously it is 20% less than you think. It includes also any other funding that the landlord is able to pull in, including local authority or Green Deal funding. Already, it starts to look like less, as it will not always be the landlord putting the £3,500 in.

I would not call them loopholes, but we then have some other ways for the landlord to invest less. One is the recognition of previous investment, which clearly is often possible. How do the Government expect to avoid that in many cases? The second point I have concerns about is the high-cost exemption. It is not hard to get estimates for jobs. Frankly, if you ask a builder to give you high estimates for jobs, they are usually better at that than they are at low estimates. I suggest that that is a gaping loophole for unscrupulous landlords, sadly many of whom operate in this sector. I would welcome the Minister’s view on that.

Another potential issue was brought up in the debate of 2016 to which I referred earlier. The Secretary of State, Andrea Leadsom, said that,

“landlords will be required to install only measures that cost the same as or less than their expected energy savings over a seven-year period, and they will be eligible for an exemption if the improvements do not meet that payback test”.—[Official Report, Commons, Fourth Delegated Legislation Committee, 8/6/16; col. 4.]

There is no mention of that payback test in the accompanying material to this SI. Could the Minister please explain that status?

My final point is this. The Minister mentioned that those obtaining an exemption will be put on a register. Will he undertake that this will be a public register so that those landlords would be fully knowable to the wider community? I await the answers to those questions.

My Lords, I thank the Minister once again for his exemplary introduction to the regulations before the Committee today. I note that, at last, we have come out of the jurisdiction of no-deal outcomes to look at matters of great importance that are, nevertheless, outwith our previous debates on the tranches of SIs that deal with a no-deal scenario.

We come now to the important aspect of energy efficiency, a necessary and effective part of our infrastructure improvement to reduce and remove carbon emissions in the longer term. I always thought that it was a very key part of the Green Deal, introduced— I hasten to advise the noble Lord, Lord Fox—during the coalition years under a Liberal Democrat Minister of State in DECC, and it was to his great regret that it eventually collapsed, as we showed at the time, through very great difficulties in its construction.

This SI provides amendments to the Energy Efficiency (Private Rented Property) (England and Wales) Regulations 2015, which introduced mechanisms to require landlords to improve their properties so that they could reach the minimum long-term lettable level of EPC band E by 2020 following that primary legislation. If they have not improved to this standard or do not have an exemption certificate after this date, such properties will be deemed substandard, and in principle not legal to let.

The Green Deal came in in 2011 and was of such complexity and difficulty that it took four years to produce the 2015 regulations. However, they were cancelled almost immediately afterwards following their difficulties. The regulations relied extensively on the assumption that bill payers could avail themselves of the Green Deal to improve their properties, and the cost to the landlord was appraised on that basis—that is, if a landlord had an assessment and the improvements were economic up to band E with a Green Deal loan programme, that would discharge his or her improvement responsibility.

However, with the cancellation of the Green Deal, the SI became inoperable; hence it has taken another four years for the 2018 amendment regulations to retain the requirement to improve and the level of improvements to aspire to, but they substitute for the “no cost to landlord” provisions related to the Green Deal a maximum spend for an F-rated or G-rated property of £3,500 by the landlord in order to reach the minimum. If the property cannot be improved to band E for that sum and the landlord can show that he or she has spent the maximum on it, a certificate of high-cost exemption can be applied for, which exempts the landlord from doing further work to bring the property up to band E.

As I said, the original 2015 regulations took four years to arrive following the passage of the Energy Act 2011, and they collapsed almost immediately. As simple arithmetic shows, there has been an eight-year period to bring various features to improve the energy efficiency of homes. They have eventually been laid following tortuous argument about the level of financial liability which landlords should be responsible for when they rent out very poorly insulated properties in bands F and G, and the point at which they should then be able to rent out such low-standard properties after 2020 if exempted from the full cost of raising the standard of the property.

The Government’s consultation proposal was that landlords should be exempted after a maximum of £2,500 of expenditure. This received a frosty reception from consultees, 79% of whom argued that the limit was too low. Among other arguments put forward, it was pointed out that, according to the Government’s own impact assessment figures, only 30% of F and G properties would be uprated at that level; the rest were to be exempted. The favoured level of landlord contribution of £5,000 was endorsed by half of the total number of consultees, and 60% of those said that the £2,500 level was too low. Impact assessment projections suggested that, with a £5,000 level in place, some 73% of F and G properties would successfully be rated up to band E.

The first thing to be said is that on this side of the House we somewhat regret the lower level that the Government put into the regulations. Indeed, the Government’s response to the consultation was to concede the uprated figure of £3,500, which has been incorporated into this SI, as their operational alternative to the 2015 SI. This would mean that 48% of properties would reach the required level. In other words, turning it upside down, it means that 52%, the majority of properties, would end up exempt, with the landlord not required to do any more to an F or G-rated property let out after 2020.

So while we support the fact that a cap is now in place that creates an environment for the improvement of properties, removes uncertainty and will necessarily increase minimum standards, nevertheless the assumption that properties in another category of multiple occupancy are still largely excused from the regulations for a further five years is particularly regrettable. We regret that this lower level has been introduced. I ask the Minister whether the Green Deal could be repurposed to provide finance for landlords, above the £3,500 level, to £5,000, such that the future affordability of this very necessary amendment to implement the Green Deal could be brought forward.

The noble Lord would like a higher figure than the one we came to after considerable consultation—the increase from the £2,500 we originally proposed to £3,500, which is what these regulations are about. He has suggested, and I presume this is official Labour Party policy, a figure of £5,000. I suspect that if we had suggested £4,500 or £5,000, he would have suggested £6,000, so I do not think we can win on this. The simple fact is that we thought it right that those landlords who are not making any contribution should be encouraged or made to make some contribution. We are talking only about those 6% of properties that fall below the standard I set out in my opening remarks. The implication behind that is that the landlords of the other 96%—it is actually 94%, I am grateful to the noble Lord, Lord Fox—are doing the right thing, as any sensible landlord would do. It is not just about being good to their tenants—although that has an obvious benefit in encouraging tenants to stay and reducing the amount of void time—but much of the expenditure on improving the property will improve its capital value and be of benefit to the landlord. So although I believe, as a good Conservative, in the rights of property, I think it is right that we offer some encouragement to landlords—and this is more than encouragement—to spend money on maintaining their properties and ensuring that their tenants and the wider public benefit from improving the energy efficiency of those properties to at least band D and to higher bands in due course.

I thank the Minister for stating that the added benefit of the rise from £3,500 to £5,000 produces a very considerable increase in the number of properties that would then comply. This would provide a win-win scenario whereby the tenant had reduced future bills for maintaining the property and the landlord saw an increase in the value of his property of more than £8,000: the impact assessment puts the increase at £8,500. Both these figures are considerably higher, so we would have preferred to have seen a £5,000 limit in the regulations.

Again, I note what the noble Lord says; I imagine landlords up and down the country will be listening to his words. We had to make a decision based on a number of factors, but also on the viability of the whole sector. We did not want to see the whole sector being adversely affected on the basis of further modelling of the costs and benefits of the £3,500 cap. The noble Lord, Lord Grantchester, also asked why it had taken so long—four years, as he said—to lay this SI. It took time to build consensus among the wider stakeholder base and to consult properly, which on this occasion was welcomed by the noble Lord, Lord Fox.

The noble Lord, Lord Fox, then confused me by referring to the 2016 debate, implying—I am sure he did not intend to—that that was the debate on these regulations. That debate was to postpone the launch of the exemptions register by six months. It did not relate to this amendment to include a landlord contribution. All this does is to seek that the landlord should make a contribution. These regulations were debated in another place on 14 January this year. They were introduced by my right honourable friend Claire Perry, and it is open to the noble Lord to look at the First Delegated Legislation Committee from that date in Hansard. What happened in between? The 2015 regulations were made on 26 March 2015 and the provisions we propose to amend came into effect in April 2018.

The noble Lord then asked if the register will be made public. Yes, the register opened in 2017, and information registered on it is publicly available and searchable. The noble Lord, Lord Fox, regretted the inclusion of that in the £3,500 cap. We acknowledge that that has an impact on the scale of the improvements that can be delivered, but we nevertheless believe that that is offset by the increase from £2,500 to £3,500. The noble Lord, Lord Grantchester—being more severe than me—would like to take that yet further. Again, these are questions of balance and I believe we got it right with £3,500, even though the £3,500 includes that.

The noble Lord, Lord Fox, asked if the amending regulations are asking landlords to provide three installer quotes and whether that was making it too onerous and complicated. The requirement to provide three quotes applies only where the landlord is looking to avoid making any improvements and to register an exemption on the basis that even the cheapest improvement would exceed the value of the cap. Our analysis showed that virtually all properties can receive at least one measure costing less that £3,500, so we expect this exception to be invoked very rarely. The noble Lord will know that it is plain common sense to get more than one quote. If they are using it to seek an exemption, it is quite right that there should be three.

I appreciate that answer. Clearly, if anyone is considering work, it is helpful to get more than one quote. I was implying that this would be a construct to not do the work rather than to do the work cost-effectively. It is not beyond the bounds of human ingenuity to use the high-cost exemption to get out of doing work. On that basis, I ask that the Minister’s department monitor the use of the exemption and come back to Parliament after some time to tell us whether his thought is correct and it is not being used very often, or whether it is in fact becoming a useful loophole for unscrupulous landlords.

I fully accept the noble Lord’s point that the unscrupulous—we are talking about a relatively small number of very small landlords—could seek exemption by getting quotes from friends and all that sort of thing. We all have our views about certain aspects of the building trade and so on, but I do not think it is worth me going any further at this stage. I give him an assurance that we will do what we can to keep an eye on this issue—to monitor it, as he puts it—and if it turns out that too many exemptions are being sought for the sort of reasons that he mentions, I think my right honourable friend would be the first to say, “This is not working as we intended so we’ve got to try something else”.

The noble Lord, Lord Grantchester, made two other points. The first was about houses in multiple occupation. They will be covered if they are legally required to have an EPC and if they are let on a qualifying tenancy. Some HMOs are not required to have an EPC at this time, but that is something that the department is keeping under review. If we think it is necessary that we act, we will do so.

Will the Minister write to me on how many would be exempt and how many would fall into the regulations with which he says they would then have to comply? My understanding was that more would be exempt, and there were a very limited number of occasions on which property in multiple occupancy would have to abide by the regulations.

I offer to write to the noble Lord. I will see if we have the sort of figures that he wants on HMOs and whether I can bring a bit more detail on that.

Finally, I make it clear that the Green Deal has not been cancelled. It still exists. The Government ceased funding it in 2015 but the mechanism remains active and private finance continues to operate in the sector.

I asked one question about the limits on profitability in the private finance investment in the Green Deal. If the Minister wants to write to me on that rather than answering at the Dispatch Box, that is fine.

I apologise to the noble Lord; I am afraid I had not jotted that down. I will write to him in due course and give him an answer on that point. Other than that, I think I have dealt with all the questions.

Motion agreed.

Committee adjourned at 5.49 pm.