Energy efficiency and condition standards in private rented housing

Energy efficiency and condition standards in private rented housing Response by the Council of Mortgage Lenders to the Scottish Government consultation paper Introduction 1. The CML is the representative trade body for the residential mortgage lender industry which includes banks, building societies and specialist lenders. Our 136 members currently hold around 97% of the assets of the UK mortgage market. In addition to lending for home-ownership, the CML members also lend to support the social housing and private rental markets. 2. We welcome the opportunity to respond to the consultation on Energy efficiency and condition standards in private rented housing. We have responded with a range of general comments which highlight mortgage-related impacts arising from the imposition of standards of this nature, as well with responses to those of the specific consultation questions that relate to or could have an impact on lender interests. General comments 3. We welcome in principle proposals that could improve the condition and standards of mortgaged private rented homes. Lenders understand the benefit of works and measures to improve and better maintain properties that are secured for mortgage purposes. 4. It would be helpful for government to provide guidance to owners on the types of improvements that might need to be made, and their average scalable energy savings (e.g. double glazing: 20 points; smart lighting: 15 points and such like). Although landlords are likely to have a general steer in this regard from an Energy Performance Certificate, which most properties should have at the backstop date, there is no general guide as to what are the most effective ways to improve standards. We would like to see government provide this sort of guidance to the market on how to act (what measures to install) to achieve the most cost-effective improvement and avoid unnecessary additional costs for landlords. 5. The proposals give rise to issues most particularly in relation to existing lending, rather than for new lending. There are also issues that could arise in respect of requests for additional borrowing from landlords to cover the costs of bringing their property up to the required standard. 6. Where a property does not meet the required standards, and is already rented and mortgaged, there is a risk that the mortgage might not be paid if the property could no longer bet let. This could result in higher levels of arrears on BTL mortgages. This risk could increase for landlords who have multiple properties of the same type. We suggest that any enforcement by local councils on landlords with multiple properties below standard should be flexible to allow for the cumulative burden on landlords in these circumstances and the additional time it might take them to afford, procure and deliver the required works. 7. If mortgage payments are not made, as a result of the requirement to improve the property, and the lender instructs an LPA receiver on the property on the un-improved property, then the lender would also be unable to let the property (without making improvements). This could incur further losses and further financial detriment to the defaulting landlord borrower. There might be a situation where the cost of the improvements could drive a landlord into a default situation and there may also be a worst case scenario where the landlord also does not make the improvements. We suggest that, particularly for landlords with portfolios including multiple properties that require improvement, a scheme of up-front grants could help pay for the works and mitigate against issues with affordability, cumulative business impact and the effects of any pipeline delays in procurement and delivery. 8. If the property cannot be let, this could impact the saleability and marketability of the property. This could drive property values downwards. address North West Wing Bush House Aldwych London WC2B 4PJ telephone 0845 373 6771 fax 0845 373 6778 website www.cml.org.uk

9. There could be unintended consequences and potentially disrupting impacts on the BTL market in Scotland as a whole, with the potential to increase demand and rental prices for improved properties while the additional costs for landlords, the capacity of available local trades to undertake the works, and complications in lending decisions all potentially acting as a drag on supply. 10. There could be unintended consequences with the operation of Rent Pressure Zones and the system for agreeing landlord improvement costs in RPZs. If a consequence of mandating improvement could be to drive rental prices higher in the improved stock, then this could accelerate the incidence of local authorities applying for the designation of Rent Pressure Zones. There could be a spiralling effect of local authority enforcement of energy efficiency and condition standards which in turn drives their desire for designation of RPZs. The result could be an escalation of landlord costs while more rents are potentially capped by the operation of RPZs. 11. The causation chain could be: sub-standard property leads to enforcement and/ or improvement cost, in turn leading to increased demand and upward rent pressure, in turn leading to RPZ designation, in turn leading to capped rent in turn leading to higher demand. The outcome could be a high demand for improved and rent-capped properties in which landlords costs have increased but their rental income has decreased or is restricted, with consequent impacts on property valuations and rental and sales values. Overall, this could represent a disruption to the market, which would be a concern to lenders as it would introduce uncertainty and could mean their pricing and risk models could quickly become out of kilter with prevailing market conditions. In addition, essential valuations for lending decisions would be less certain. 12. If properties do not meet the required standards, it is possible that lenders will not agree BTL mortgages on unimproved properties. If the property is already owned, this might have the unintended consequence of trap borrowers into their existing lending, until such time as the property is improved and an updated EPC is available to evidence that the improvements required by the minimum standards assessment report. 13. There could be a significant impact on existing lending (the back book), with work required on all BTL properties to understand their EPC rating. On some properties that have been rented long term, there may not be an EPC available. If additional borrowing is requested to complete the works, a process would need to be established for this. 14. Lenders would need to work with their valuers to review their terms of engagement such that the EPC would be considered as part of the valuer s report to the lender. 15. There could be implications for applications for further advances. When an application is received for a further advance on the BTL property, lenders would need to ensure that, at the time of the application, the property meets the required EPC grade. Where this is not the case, lenders would need to ensure a suitable process could be established to check the required improvements have been made to the property before releasing funds. This adds complication to the process and could potentially slow down or delay lending decisions, potentially to the detriment of customers and the overall customer journey. 16. The proposals mean that lenders will need a different approach in Scotland to the approach in England and Wales, where the PRS energy efficiency standards and timetable are different. Again, this adds complications for lenders, and government should be aware that this could have an impact on processes for evaluation of BTL mortgage applications, underwriting and lending decisions. 17. There is a concern that the proposals could require improvements to properties that are not readily improvable. Many pre 1919 stone-built properties, for instance, could have intrinsic limited potential for improved energy performance without undertaking disproportionately costly works that might undermine the character and value of the property. Again there could be tensions with the operation of the RPZ regime. For instance, in pressured zones such as Edinburgh Old and New Towns, many stone-built tenements are not only in conservation areas but also intrinsically limited in their potential for higher energy efficiency performance. So for landlords, these more difficult to improve homes could require more costly interventions with reduced or capped rental income.

18. We suggest government should more closely consider, analyse and model the cost implications of tensions such as these, between the proposed regime of mandated improvements and the RPZ regime. Specific comments 19. We have responded with specific comments to those of the consultation questions relating to issues of relevance to lenders or that might impact lender interests, as follows: Question 1.1- Do you think that only tenancies covered by the repairing standard should have to meet minimum energy efficiency standards? 20. This seems sensible in the circumstances. Question 1.2 - We propose to link the minimum energy efficiency standard to the energy performance certificate as we think this is the most suitable mechanism. Do you agree? 21. This seems sensible as the EPC is established and understood, although imperfect. Question 1.3 - (a) Do you think there are elements of the energy performance certificate assessment that would need to be altered to support a minimum energy efficiency standard? 22. The assessment might need to be more detailed and nuanced to clearly highlight the most cost-effective improvements that could be made to deliver the target level of performance. Government should consider the extend to which the simplified methodology of RD SAP is capable of delivering the required clarity. Question 1.4 - Do you think that the minimum energy efficiency standard for private rented properties should be set at an energy efficiency rating of E in the first instance? 23. This seems sensible and consistent with measures already applying in England. Question 1.5 - Do you think that the minimum energy efficiency standard should first of all apply only to those properties where there is a change in tenancy, and after that to all private rented properties? 24. This seems a sensible trigger point for the requirement to apply. Question 1.6 - Do you think that 1 April 2019 is the right date to start applying the minimum standard of E when there is a change in tenancy? 25. More time (a later start date) might be required to enable landlords to obtain assessments and to procure and afford the required works. Question 1.7 - Do you think that 31 March 2022 is the right date by which all privately rented properties would need to meet the minimum standard? 26. This seems sensible, although if the start date is later then the end date for achieving minimum standard should also be adjusted so that there is still the same timeframe available within which assessments and improvements can be made. Question 1.8 - Where a property has an EPC of F or G at the point of rental: (a) do you think that we should require the owner to carry out a minimum standards assessment before renting the property out? (b) do you think that we should allow a period of six months from the date of the minimum standards assessment to carry out the improvement identified by the assessment? (c) do you think that the owner should have to provide a post-improvement EPC to prove that the necessary improvements have been made?

27. Where the property is mortgaged, we would expect the regime to operate in a way that minimises the potential for disruption of the rental income steam that sustains the mortgage. Lenders will be concerned by any delay that prevents the property from being let as this could undermine the landlord s ability to pay the mortgage and potentially result in increased incidences of arrears. Question 1.9 - We think that all privately rented properties should have to meet the minimum standard by 31 March 2022. Where a property does not have an EPC of E: (a) do you think that we should require the owner to carry out a minimum standards assessment by 30 September 2021 (the backstop assessment date)? (b) do you think that we should allow a period of six months from the backstop assessment date to carry out the improvement identified by the minimum standards assessment? (c) do you think that the owner should have to provide a post-improvement EPC to prove that the necessary improvements have been made? 28. The 6 month timeframe from the backstop assessment date within which improvements have to be made could be tight. If many landlords put-off their assessments to the last minute, then the surge in demand for assessments and required works might not be deliverable by local assessors and trades. This could result in delays which, as we expressed above, could cause disruption to rental income with knock-on consequences for the BTL mortgage. This will be a concern to lenders. Question 1.10 - We are proposing that there should be a new minimum standards assessment based on the EPC methodology that will tell an owner how to bring their property up to standard. Please tell us your views on the following elements of that proposal: (a) that the assessment would use EPC methodology, since that is how we are proposing the standard is set; (b) that the assessment would work out the lowest cost technically appropriate package of measures to bring the property up to standard, based on the average of costs used in EPC methodology; (c) that the assessment would set out the package of measures to meet an energy efficiency rating of E, and separately of D, from the property s current rating; (d) that the assessment would include a calculation of the property s EPC rating before identifying the appropriate measures, where there is no EPC under the current version of the EPC methodology; (e) that the assessment could include measures which are not currently in the EPC assessment, but which can be measured in the RdSAP methodology. If you agree with this proposal, please provide suggestions for what these measures might be, and what costs should be used for these; (f) that the assessment would cost in the region of 120-160. 29. This appears broadly sensible but we are concerned RdSAP might not be capable of delivering the required assessment outputs. As in our general comments, government should provide accompanying guidance to the EPC and assessment that explains for landlords the most costeffective ways in which the required improvements could be made. Question 1.11 - Do you think that the assessment should only recommend a package of measures which improves both the energy efficiency and environmental impact scores of the property? 30. The assessment should report measures that will enable landlords to respond to the core purpose of the initiative. If the intention is to improve only the energy performance dimension then only measures that deliver this should be reported. If both energy efficiency (EE) and environmental impact (EI) are to be improved as a core purpose of the initiative then the report should identify measures that will deliver this. There should be clarity up front from government as to what is intended to be achieved. 31. If the purpose is to improve both EE and EI, then it might be more helpful for the assessment to explain which measures and possible combination of measures could improve both energy efficiency and environmental impact. So a report might make clear that installing double-glazing to a property heated by coal fires might improve efficiency more than it improves environmental impact. The system would then have to score the extent to which improvements in scenarios such as this would be sufficient to achieve minimum standards. Question 1.12 - We propose to develop a new role of minimum standards assessor.

(a) Do you think that a new role of a minimum standards assessor is needed? (b) If so, what additional skills beyond those of an EPC assessor would be needed? (c) How long do you think it would take to get this in place? (d) Who do you think should maintain the register of assessors? 32. A new role of minimum standards assessor, suitably skilled and resourced, would help ensure consistency in reporting and meet demand that is likely to arise in this sector as landlords gear-up to improve their properties. If SAP rather than RdSAP is used, then the level of assessor knowledge and skill required will need to reflect this. Question 1.13 - What are your views on the existing advice and information provision provided by Scottish Government for landlords and tenants? What changes, if any do you think are required? 33. Please see our comments about guidance to support the assessment report and the EPC. Question 1.14 - What financial or fiscal incentives support - such as grant and loans, tax or otherwise - would you find most useful to help to accelerate the installation of energy efficiency measures and help landlords meet any proposed standards? 34. Looking at the experience of the Green Deal, and the GD Incentive Scheme, grants and oneoff payments seem more popular with recipients than ongoing and potentially long term loan repayments. Tax incentives including through LBTT and rental income taxation could have a strong potential to drive landlord behaviour towards accelerated improvement. Question 1.15 - What impact do you think the introduction of minimum standards would have on local supply chains for energy efficiency works? There could be a substantial increase in demand; local trades and supply chains might struggle to meet demand in some areas, particularly if landlords put-off assessment and improvement until closer to the deadline for achieving minimum standards. Question 1.16 - Do you think it would be helpful for assessors and installers to have a traditional buildings qualification that raises awareness and understanding of energy efficiency measures for older, traditional or vulnerable buildings built prior to 1919? 35. Yes, this should be essential in our view as most of the PRS stock with low energy efficiency is in this category. We also suggest that in historic/ heritage or conservation areas assessors should have knowledge and experience of the extent to which and how these properties might be improved, taking into account views of bodies such as Historic Scotland. Question 1.17 - Do you think there are additional consumer protection safeguards the Scottish Government should consider for the private rented sector? 36. We suggest that consumer protection standards should be consistent with those developed through the Each Home Counts programme. Question 1.18 - Do you think that local authorities should be responsible for enforcing the standard? 37. This depends on the extent to which the operation of the system can prevent conflicts of interest between enforcement and revenue generation by councils. Particularly in the context of the operation of RPZ/ landlord improvement costs regimes as well as the possible provision or commissioning of assessors, the picture could become muddied and there could be opportunities for real of perceived conflict that might undermine landlord trust and buy-in to the initiative. Question 1.19 - Do you think that the penalty for not complying with the standard should be a civil fine against the owner? Question 1.20 - We have proposed the following fines: 500 for failing to have a minimum standards assessment

1000 for failing to carry out the works within six months of the assessment. Do you think these proposed fines are appropriate and proportionate? 38. Any fines on a landlord should be set at a level which would not undermine the cash-flow and viability of a particular landlord business. Government should consider a process or arrangement for waiving or deferring fines in exceptional circumstances where a landlord is facing payment difficulties and to enforce the fine at the time it is due might result in unreasonable stress on the business. A lender in possession would not expect to be responsible for any fines against their landlord borrower. We would welcome government clarification of this point. Question 1.21 - We have proposed some specific situations where owners should have longer than six months to bring their properties up to the minimum standard. Do you have any comments on these proposed situations in relation to: (a) the proposed reasons? (b) what evidence you think the landlord would need to provide for each? (c) should there be other situations, such as the completion of condition works? 39. The proposal to allow longer time in specific situations appears sensible and welcomed. Question 1.22 - We have proposed some situations where we think owners should not be penalised for not carrying out the full improvement identified by the minimum standards assessment. Do you have any comments on these in relation to: (a) technical reasons (b) legal reasons (c) excessive cost reasons (d) the proposal that this would remain valid for a period of not more than 5 years? 40. The proposal not to penalise an owner in some situations appears sensible and is welcomed. Question 1.23 - For local authorities to be able to enforce and monitor the proposed minimum standards: (a) what processes do you think local authorities will need to have in place for (i) normal compliance (ii) monitoring extended periods for compliance (iii) monitoring situations where not all of the improvements are made? (b) what implications would this have for local authorities? Question 1.24 - What opportunities do you think there are to combine enforcement of minimum energy efficiency standards with other action in the private rented sector? 41. This would be for government and local authorities to consider, however, our earlier point about the (real or perceived) conflict between local authority enforcement and income generation should be sufficiently addressed in any arrangement that might be taken forward in this respect. Question 1.25 - Do you think that we should set out now the minimum energy efficiency standard after 2022? 42. Setting a post-2022 standard now would help to provide a clear goal for the sector which landlords could plan a trajectory for delivery. There could be a risk, however, that intervening circumstances might change and a goal set now might be inappropriate or less appropriate for the future. Question 1.26 - Do you think that the next standard should be to meet an EPC of D at point of rental from 1 April 2022, and in all privately rented properties by 31 March 2025? 43. We support government s ambition to improve the private rented stock in this way, but we are concerned that EPC D might not be realistically achievable for a significant proportion of pre-1919

stock, because of its nature (e.g. stone built) and/ or location (e.g. in a conservation area or protected heritage site). Question 1.27 - When increasing the standard to EPC D, we propose that the cost cap will be 5000 for properties with an EPC of E, and 10,000 for properties with an EPC of F or G (which would include any spend made to improve the property previously following a minimum standards assessment). Please tell us your views about this proposed cap. 44. The setting of improvement costs caps is welcome, however we feel any caps should be kept under review to ensure they remain appropriate in the prevailing market, taking into account not only the cost and availability of materials/ equipment but also the cost and availability of trades/ labour to undertake the works. Clarity should also be provided on whether VAT is included within the cost cap. Question 1.28 - What are your views on the provisions in general for exceptions to the D standard, including that a property which has an exception from meeting E should not automatically be excepted from meeting D? 45. The provision of general exemptions from the proposed EPC D standard appears sensible and reasonable. However, because some property types (e.g. stone-built pre-1919 conservation/ heritage site location) are intrinsically limited in the extent to which their energy efficiency might be improved, it would seem sensible to automatically exempt them from D if they have already been exempted from E. We suggest that, for properties in these situations, the proposals should work in a way that encourages and supports the highest standard that is reasonably achievable and cost effective in all the circumstances. Question 1.29 - What do you think the main benefits would be of introducing a minimum standard higher than D? 46. It is difficult at the time these proposals are being formulated to identify and quantify the benefit of a minimum standard that is higher than D. It is possible that such higher standards might not be reasonably achievable in a cost effective way, given the nature of some of the older stock. Pursuing an unachievable goal could be fruitless and potentially drive effort and resources away from other important priorities such as delivering new PRS supply, including through Build-to-Rent. Question 1.30 - We think that any increase in the standard beyond D would bring new challenges in the form of cost, technical considerations and alignment with the Climate Change Plan. (a) Are there other new challenges you are aware of? (b) How do you think we could address these challenges if we raised the minimum standard beyond energy efficiency rating of D? 47. It is not possible for us to speculate on such future challenges or how a future government might wish to address them. Question 1.31 - Please tell us about any potential economic or regulatory impacts, either positive or negative, that you feel the legislative proposals in Part 1 of this consultation document may have, particularly on businesses (including landlords). 48. We highlight again our support in principle for improvement of the PRS stock provided this is achieved in a reasonable and cost-effective way that does not undermine landlord businesses or the rental income streams that they rely on. We are concerned that the cumulative regulatory and economic impacts not only of this initiative but also of other aspects of SEEP/ LHEEP as well as taxation changes and changes to BTL underwriting standards could prove unsustainable for some landlords and result in some choosing to exit the sector. Government needs to be alive to the risk that an unintended consequence of this and other changes could result in a loss of perfectly adequate PRS stock at a time when more acceptable quality supply in this sector is needed.

General comments on condition standards 49. Many of the proposals for condition standards in PRS accommodation appear sensible and reasonable to the extent that they seek to achieve consistency as between accommodation in the social and private rented sectors. 50. As with the proposed energy efficiency standards, however, we are concerned that the cumulative effect and additional cost burden the proposals would place on landlords could impact business viability in some cases and might mean some landlords of generally acceptable properties consider exiting the sector. This could result in an unintended consequence of reducing the levels of acceptable PRS housing at a time when the sector is playing a vital role in meeting supply shortages in other parts of the market. 51. In relation to the proposals that could see the repairing standard amended to include a duty on landlords to provide cookers, fridges and freezers, while we support the principle that PRS homes should have reasonable capacity and facilities for the storage and preparation of food, there is a potential concern that the proposals could see landlords facing additional cost burdens for gas and electrical safety testing. It will be for landlords and their representative bodies to consider whether it is reasonable for landlords to absorb these costs. It could also be argued that the regular testing of such appliances will help to maintain tenant safety and the safety of the property points which are particularly salient at this time following the Grenfell Tower tragedy in London where the blaze is reported to have originated in a faulty fridge-freezer belonging to a tenant. Contact from 1 July 2017 52. From 1 July 2017, the finance and banking industry operating in the UK will be represented by a new trade association, UK Finance. It will represent around 300 firms in the UK providing credit, banking, markets and payment-related services. The new organisation will take on activities previously carried out by the Asset Based Finance Association, the British Bankers Association, the Council of Mortgage Lenders, Financial Fraud Action UK, Payments UK and the UK Cards Association. 53. To discuss this submission further in the meantime, please contact john.marr@cml.org.uk 29 June 2017