Revision of landlord-tenant laws

In rented buildings, energy efficiency improvements are hampered by an uneven cost-benefit distribution. In normal circumstances the owner of the building must initiate and pay for any investments in his property, whereas only the building user can reap the benefits. As energetic improvements can incur substantial costs, landlords are reluctant to take on this burden.
This barrier can be overcome by revising landlord-tenant laws. In fact, a revision should allow landlords to refinance upfront investments in energy efficiency upgrades through rent increases imposed on tenants.
Ideally, tenant costs are, in turn, compensated or even overcompensated through monthly energy bill savings.

Worldwide implementation status

Examples of countries having implemented this policy include France, Netherlands, the UK, and partially Germany.

Governance level

Landlord-tenant laws are, generally, in the hands of national legislation.

Related sectors

• residential
• services

Building concepts

• Low-Energy Buildings
• Ultra-Low-Energy Buildings
• Nearly-Zero-Energy / Plus-Energy Buildings

Options

Passive options

• Thermal comfort
• Building envelope
• Shading
• Colour
• Passive coolong techniques
• Passive solar heating

Active options

• Mechanical ventilation
• Cooling
• Heating
• Domestic Hot Water
• Lighting
• Building transportation
• Building integrated renewable energy systems

Note that energy efficiency improvements in rented building space should require the consent of tenants. Different refurbishment actions affect the daily life of tenants to varying degrees. For example, improving the building envelope affects tenants more and for a longer period of time than merely insulating the basement ceiling.

Related target groups

• Investor: Through revising the landlord-tenant law landlords are expected to invest in energy efficiency retrofits of their buildings since cost incurred may be refinanced through increased rents.
• Tenant: The law should require that tenants give their consent to energetic building retrofits and to increased rents, which are compensated or overcompensated through monthly energy bill savings and increased living comfort.
• Energy consultant: Consultants are needed to estimate the achievable energy costs savings in advance so that the maximum rent increase can be determined.
• Engineering consultant: Consultants are needed to estimate the achievable energy costs savings in advance so that the maximum rent increase can be determined.

The belowmentioned indirect beneficiaries all benefit due to increased demand for their products or services.

Direct beneficiaries

• Investor

  Although upfront expenses need to be covered by the building owners, revising landlord-tenant laws safeguards that tenants, who benefit from monthly energy bill savings, partake in energetic building investments. In the long run, the landlord benefits from higher rents and an improved building condition (e.g. attractive to future tenants).

• Tenant

  The direct benefits of tenants depend on the energetic improvement. If energy bill savings are higher than rent premiums, the tenant benefits moneywise. Non-monetary benefits (e.g. enhanced living comfort) may follow from energy efficiency investments, as well.

• User

  Users like guests or employees also benefit from the non-monetary improvements (e.g. better indoor air quality, better lighting, etc.)

Indirect beneficiaries

• Installation contractor

• Manufacturer

• System supplier

• Bank

• Consumer organisation

• Energy consultant

• Engineering consultant

Relevant barriers

• The investor-user barrier: Revising the landlord-tenant law allows landlords to gradually refinance energetic upgrades through increased rents.
• Economic and financial barriers: The economic barrier is closely interrelated with the investor-user barrier. Since investment cost can in the long run be amortised through rent increases, investment costs are actually paid by the party who also directly benefits from monthly energy bill savings
• Lack of interest and motivation in energy efficiency-improvement: Under normal circumstances, it may be time consuming for landlords and tenants to negotiate energetic building upgrades. A revision of the legal framework can reduce such transaction costs and uncertainty. For example, a revision of legal documents can include that energy bill savings must be at least as high as the costs incurred on the tenant through increased rents. So that tenants are not put in a disadvantaged position.

Relevant incentives

• Increased (re-sale) value of the property: For landlords, energetic improvements increase the value of the property and, thus, the rent and revenues.
• Directly increasing earnings or profits for actors on the supply side: While energetic investment impose short- to mid-term costs on landlords, they benefit from higher rents and higher value of their buildings in the long run. The expenses for the energy efficiency measure(s) and the (legally possible) rent increases define the amortisation period.
• Saved energy costs: Tenants benefit from lower energy bills. To ensure this, legislation should require that rent increases do not exceed energy bill savings.

In order to assure all stakeholders in the building and construction sector of reliable market opportunities, energetic building improvement should be guided by firm political commitment to increase energy efficiency in the building stock. This commitment may include, for example, targets for a particular refurbishment rate per year and a total number of refurbished buildings within a particular time frame. The construction / refurbishment industry would, then, employ workers over the long-term and could invest, for example, in R&D.

A roadmap to gradually phase out the least efficient buildings accompanied with penalties for non-compliance is an important tool for motivating landlords to initiate building refurbishment. This also incentivises tenants to give their consent to energy efficiency improvements. A minimum energy performance standard for buildings, adjusted every few years, should be established to define the threshold for “least efficient buildings.”
Apart from such “sticks,” policymakers can and should also make use of “carrots,” i.e. financial incentives because upfront costs may still be too high for some landlords (although expenses for energetic building improvement are refinanced by increased rents). Front-end financing options comprise soft loans or grant schemes. Financial instruments should target good or, ideally, best energy saving practices or performances (e.g. ultra low energy buildings). The better the energy efficiency performance, the better the incentive could become. As a tool to identify building performance a mandatory energy performance certificates or building energy label and disclosure scheme could be used (e.g. as implemented in the European Union). This will help increase demand for energy-efficient dwellings or office space and hence the value of energy-efficient buildings, particularly if coupled with an obligation to disclose energy costs along with the basic rent.
Beside financing issues, uncertainties about the energy performance of the building after retrofit should be reduced to avoid legal conflict between landlords and tenants. Policies facilitating technical support (e.g. energy consultants) should be effective a) to identify the most adequate energetic measures and their cost and b) to calculate energy savings and associated rent increases. Policies may include a government database with energy experts (also reducing transaction or search costs), a training and certification scheme for energy experts as well as financial support for building owners (e.g. through grants). For major refurbishments (e.g. deep retrofits to passive house standards) highly trained experts could be financed with the help of government funds to provide assistance during the refurbishment process.
Moreover, a database with reliable firms of the construction / refurbishment sector may increase building owners’ confidence in firms and reduce transaction costs, as well.
Last but not least, information sources should be available for landlords and tenants regarding legal issues, financing support and refurbishment measures and technologies. A central website or local energy information centres could be important facilitators to reduce uncertainties offering unbiased support.

The following pre-conditions are necessary to implement the revision of landlord-tenant laws:

Agencies or other actors responsible for implementation
The revision of a law is an act by respective national parliaments. For implementation, local authorities or energy agencies may be given the task to check and confirm if energy cost savings are equal to or higher than the increase in the basic rent, and / or to monitor compliance with this legal requirement.

Funding
The actual act of revising the landlord-tenant law is only a parliamentary procedure and is, thus, covered by state expenses. As such the revision should be communicated to the public properly and within due course.
The lion’s share of the energetic building refurbishment should be privately funded. Government financing support may accelerate refurbishment measures.

Prior to the decision to revise the landlord-tenant law, it is crucial to take into account concerns of relevant stakeholders and establish safeguards so that tenants will not be overburdened by excessive rent payments.
In addition to that, a pre-study could discuss the implications of the new law on other policies or the implementation of new policies to accelerate the refurbishment rate in the existing rented building stock.
Ex-ante assessments can later help in identifying pi_TFAlls of the revision and in adjusting the measure if necessary.

Quantified target
In order to assess and evaluate the legislative revision, the government should establish an annual refurbishment rate as well as mid- and long-term objectives for the total number of retrofitted rented buildings and the total energy savings to be achieved.

International co-operations
At international workshops, international best practices can be discussed. It might be interesting to explore accompanying measures and policy packages (cf. “Overcoming the split incentive barrier in the building sector Workshop” facilitated by the European Commission (2014)).

Monitoring
Monitoring quantified targets depends on whether governments have established a general reporting system for major building refurbishments. If this is implemented, governments can capture the total number of refurbished buildings used for renting. Such a reporting system may also be linked to the disclosure of energy performance certificates or building energy labels, to compliance monitoring, or to financial incentie schemes.
Since major refurbishment must be in line with structural building requirements, a governmental building agency should keep track of such information. If consultants are involved in the implementation of energy efficiency retrofits, the agency in charge may collect the savings predicted by the consultants in a database.

Evaluation
In order to evaluate energy savings, the building agency itself or a contracting body may conduct spot checks and surveys in order to assess the energy performance before and after the refurbishment and how much energy can be saved. Sample information then need to be extrapolated to calculate overall energy savings.
Building standards and energy performance certificates or building energy labels for buildings could help in easily classifying the energetic performance of buildings before and after refurbishment.
Isolating the impact of the revision of the landlord-tenant law from other policies will likely be a challenge, which is why we rather recommend evaluating the impact of the policy package as a whole.

Relevant individual dynamics and side-effects

• Dynamic market transformation and/or innovation: Especially in countries where a major share of the building stock is rented (e.g. Germany) a revision of the landlord-tenant law can be a prerequisite for setting in motion market transformation and increasing the energy efficiency of the rented building stock. However, it only gives building owners the opportunity to (partially) recoup the costs of energy efficiency measures, whereas the actual implementation of building improvements can be hampered by several factors (e.g. lack of motivation). Barriers should be clearly identified. Other policies may help in overcoming such barriers (cf. policy package section). Especially a financial incentive and financing scheme will be able to dynamically drive markets towards higher energy efficiency and eventually best available technologies (BAT).
• Avoiding lost opportunities: As bigEE defines the revision of the landlord-tenant law only by a cost-sharing arrangement between building owner and tenant to finance energy efficiency investments in rented building units, the actual investment negotiation is left to the two parties. However, the government may subsidise technical support in finding the ideal solution(s) from an energetic point of view. Through other measures, such as MEPS or financial incentive schemes for BAT, the government should establish minimum thresholds for future building performance and incentivise the best energetic improvements in order to avoid lost opportunities.
• Minimising rebound effects: As tenants experience rent increases but benefit from monthly energy bill savings, they will try to hold constant their thermal comfort levels in order to maximise energy savings . Thus, rebound effects are unlikely to occur.
• Minimising snap-back effects: Keeping in force the legislation for landlords to recover energy efficiency investments until the building stock has been retrofit to higher energy efficiency levels will minimise such effects.
• Minimising free-rider effects: Without a revision of the landlord-tenant law, building owners are in a disadvantaged position since they have to cover the full costs of energy efficiency building investments without reaping the benefits. However, one could assume that some landlords invest in energetic building upgrades at their own expenses in order to raise the value of their buildings, in particular if buildings had been in need of age-related renovation. Through the revision of the law, such landlords can now free-ride since they are reimbursed by the tenants. However, such free-rider effects are probably negligible, particularly from a national economic perspective.
• Creating Spill-over effects: Without a revision of the landlord-tenant law, building owners are in a disadvantaged position since they have to cover the full costs of energy efficiency building investments without reaping the benefits. However, one could assume that some landlords invest in energetic building upgrades at their own expenses in order to raise the value of their buildings, in particular if buildings had been in need of age-related renovation. Through the revision of the law, such landlords can now free-ride since they are reimbursed by the tenants. However, such free-rider effects are probably negligible, particularly from a national economic perspective.

Design for sustainability aspects
In order to avoid overregulation, revising the landlord-tenant law will not prescribe refurbishment measures in every detail. However, the government could actively promote the consultation of an energy expert, who does not only help in finding the ideal energetic building configuration but also in taking into account criteria such as living comfort or resource efficiency.
In order to do such comprehensive assessment, the state could set up a training (and certification) programme for such experts.

Co-benefits
Depending on whether and which energy efficiency measures are taken by landlords, tenants may - in addition to the monetary benefits of reduced monthly energy bills - experience non-monetary benefits such as improved indoor air quality, health improvements due to less draught and dampness etc.
The extent of the co-benefits resulting from a legislative revision depends on the country context, particularly on the share of the building stock that is rented. For example, in Germany, 57% of private households live in rented building units (Statistisches Bundesamt 2009, p. 23), while in the United Kingdom (UK) only 30% of all households live in rented space (Warren 2014).

The following barriers are possible during the implementation of the policy
The revision of the landlord-tenant law does not automatically mean that building refurbishment is put into practice. Landlords may lack motivation, may not be able to finance high upfront expenses or fear that tenants move out due to extensive building works and / or rent increases. On the other hand, tenants may feel disadvantaged due to perceiving rent increases as higher than potential energy savings. Moreover, they may simply not want to be bothered by renovation works.

The following measures can be undertaken to overcome the barriers
A critical assessment of the barriers needs to be carried out. Policies such as financing support or technical support (already outlined in the policy package section of this article) may reduce uncertainties associated with building refurbishment. Minimum energy performance standards banning least efficient buildings may urge both, landlords and tenants to agree on refurbishment.

Data on achievable energy savings due to revising the landlord-tenant law is hardly available. Energy savings depend on the country context, on the other policies and measures implemented and, particularly, on the concrete retrofit measures taken by landlords as a result of the revised landlord-tenant laws.

The costs for the actual revision of the law including communication to the public are absolutely marginal. Since it is the rationale of the revision to have energetic refurbishment in rented building space primarily privately financed, there are hardly any costs directly incurred to the government by this policy.

Assuming a large share of rented buildings, potential cost savings are very high.
From a societal perspective, residential building space often requires around one fifth to one third of the primary energy demand of a country. Large scale energy-efficient refurbishment can reduce the need for new power plants and for importing energy resources.
The cost-sharing arrangement promoted by revised landlord-tenant laws incentivises building owners to invest in energetic buildings improvements. In the long run, they will benefit from increased revenues. For tenants, in turn, energy cost savings may be equal to or higher than rent increases. In certain circumstances, energy savings may be higher than rent increases creating additional household income. Non-monetary issues such as increasing living comfort and health benefits can be very valuable co-benefits for tenants.