"Navigating Energy Renovations in Rented Properties: Tackling the Split Incentive Dilemma"
Insights into UIPI’s study
As the European Union strives towards climate neutrality by 2050, the focus on reducing energy consumption in buildings has intensified. Hence, the European Union’s Energy Performance of Buildings Directive (EPBD), that entered into force on 28 May 2024, is a key policy piece in this endeavour for the building sector. Central to this effort is overcoming the “split incentives dilemma” in rented properties, between a landlord and their tenant. The International Union of Property Owners (UIPI) has published an insightful study addressing these challenges.
The so-called split incentives dilemma arises in situations where the benefits of energy efficiency investments do not directly accrue to the party making the investments. Typically, in rental properties, landlords are responsible for funding energy renovations, while tenants benefit from the resulting lower energy bills. On the other hand, tenants may lack the incentive to invest in such improvements since they are not the property owners and would not enjoy the long-term financial advantages of the upgrades.
Accordingly, European legislators have identified this challenge as one of the main barriers to the acceleration of the renovation rate across Europe. However, despite the references to the split incentive dilemma in EU law, the matter touches upon several competences that fall outside the EU domain, in particular housing and rental law. Rental law in particular plays a pivotal role in the distribution of burdens, in the creation of incentives, and in the overall success of the European policies in this regard.
A new UIPI study delves into how different EU countries are addressing this dilemma through their rental laws and policies by outlining the legislative environment across eight countries: Austria, Belgium, France, Germany, Greece, Italy, Spain, and Sweden. The report examines general provisions of tenancy law, specific regulations related to energy efficiency, and the impact of these regulations on both residential and commercial leases.
UIPI’s comprehensive study sheds light on the complex interplay between rental laws and energy renovations. It demonstrates how rent increases or evictions resulting from renovations are often either heavily regulated or not possible at all. Moreover, whether renovations could take place is often dependent on the approval by sitting tenants.
By addressing the split incentives dilemma, Europe can make significant strides towards its climate goals while ensuring fair and equitable solutions for both landlords and tenants. As policymakers, property owners, and tenants navigate these challenges, insights from this study can contribute to shaping future strategies for sustainable and energy-efficient living spaces, as well as contribute to the shaping of national policies when it comes to the transposition of the Energy Performance of Buildings Directive, due by May 2026.
