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Legislation that allows landlords to fully or partially recoup the costs for energy efficiency improvements of existing buildings or of energy-efficient vs. conventional new buildings from the tenants can help overcome the landlord-tenant dilemma. Rent increases should not exceed the energy cost savings the tenants can achieve, though. We further recommend mandating that rent plus energy costs must be disclosed to potential tenants, but that rent and energy costs should be charged separately, for reasons of transparency and incentives to continue saving energy.
In countries with a large share of residential or commercial building space being rented out (e.g. Germany), supporting legislation is needed to tap the energy efficiency potential of these rented buildings. Normally, landlords are not interested in investing in energy efficiency measures for their buildings because they would have to finance all the expenses, while only the tenants would benefit from reduced monthly energy bills.
The tenants on the other hand, might be interested in optimising energy efficiency, but they are either not allowed to implement measures (because it is not their property) or are reluctant to invest because when they move out, the investment will be lost (so-called sunk costs; e.g. if you add insulation to a building you cannot resell the material or take it with you to your new home).
This situation is known as the landlord-tenant dilemma, which is a specific form of the split-incentive (or principal-agent) problem, one of the main types of market failure in economic theory.
Landlord-tenant laws should therefore be designed or revised such that they allow building owners to increase the rent if they improve the energy efficiency of their buildings. In order to protect tenants, we recommed that governments establish safeguards, such that refurbishment works may only be carried out with tenants being properly informed and rent increases must not exceed the achievable energy cost savings (such regulation exists e.g. in France or the Netherlands).
While such (revision of) landlord-tenant laws are certainly necessary for building owners to even consider conducting energy efficiency measures, it is by far not a silver bullet: building owners may still lack motivation and / or financing capacity to undertake investments; or they may fear that tenants move out following a rent increase. Consequently, a combination of country specific “sticks and carrots” policies is needed to overcome these barriers. First, minimum energy performance standards (MEPS) for buildings, aiming at phasing out least efficient buildings, could urge landlords to improve the energy performance of their buildings. Second, energy performance certificates for buildings (also known as building energy labels) and their mandatory disclosure will help increase demand for energy-efficient dwellings or office space and hence the value of energy-efficient buildings. Third, financial support schemes (e.g. loans) could incentivise deep retrofits and implementation of BATs. Moreover, uncertainties regarding the benefits and costs of energy efficiency improvements could be reduced with the help of energy consultants (e.g. in Germany landlords or tenants can receive subsidies for on-site visits by energy consultants; BAFA 2014).
Although there are hardly any assessments available, it can be assumed that in countries with a large rented building space, there is a large untapped energy saving potential. For example, in Germany, which has a refurbishment potential of over 20 million residential housing units or dwellings (UBA & KfW 2012), over 50% of private households live in rented buildings.
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.
Landlord-tenant laws are, generally, in the hands of national legislation.
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.
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.
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 piTFAlls of the revision and in adjusting the measure if necessary.
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.
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 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.
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.
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.
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.
Bundesministerium für Wirtschaft und Ausfuhrkontrolle (2014): FAQ / Häufig gestellte Fragen.
European Commission (2014): Overcoming the Split Incentive Barrier in the Building Sector Workshop.
European Council of Real Estate Professions & International Union of Property Owners (2010): Landlord/Tenant Dilemma.
Warren, Andrew (2014): Legislative and fiscal initiatives to overcome the landlord/tenant barrier on energy efficiency improvements: the UK experience.
Statistisches Bundesamt (2009): Zuhause in Deutschland - Ausstattung und Wohnsituation Privater Haushalte – Ausgabe 2009.
Umweltbundesamt & Kreditanstalt für Wiederaufbau (2012): Climate Change and Energy Policy in Germany: Mechanisms to Encourage Private Sector Investment / Participation in Low-Carbon Development – A Case Study of Germany’s Building Sector.
Try the following external libraries:
|Energy Efficiency Policy Database of the IEA|
|The Building Energy Efficiency Policies database (BEEP)|
|Clean Energy Info Portal - reegle|