Water Bill

Written evidence submitted by Residential Landlords Association (WB 29)

About the Residential Landlords Association (RLA)

1. The Residential Landlords Association (RLA) is the premier national landlords association operating in England and Wales. We have over 17,000 members. Our members own or control over 250000 units of accommodation. Primarily our members are landlords in their own right but a number are managing and letting agents, some of whom are also landlords. Our members operate in all sub-sectors of the Private Rented Sector (PRS). Properties are rented out to families, working people, young professionals, the elderly, students and benefit claimants.


2. We focus our response on the likely exclusion of private landlords from the scope of Flood Re. Prior to the publication of the Government Response to the Consultation Paper¹ we had understood that they would be included; hence our surprise and concern to learn that landlords, unless they live in the property that they let will not be covered by the Flood Re Scheme. We understand that this is a decision by the insurance industry so we find it worrying that the Government have failed to recognise the wider implications of this proposed exclusion. We will outline what we believe the consequences of this proposal to be in this submission.

Department for Environmental and Rural Affairs (DEFRA), Government response to the public consultation on securing the future availability and affordability of home insurance in areas of flood risk, 2013

The current Statement of Principles

3. At the moment under the ‘Statement of Principles,’ cover is made available for all perils including flood or not at all in higher flood risk areas. This arrangement is already breaking down and it will end under the new regime. We will see a growth in the number of policies which simply exclude flood cover, although still cover other perils e.g. fire. Landlords faced with higher premiums or no flood cover at all will instead insure on this basis, perhaps not even appreciating the extra risk. They may have no option anyway. As a consequence over time we will see the serious consequences of this approach. Up to now, the Statement of Principles has spread the risk to a large extent due to the way in which this Statement has operated, especially as it has applied across the board to residential accommodation. This will no longer be the case once Flood Re is introduced should private residential landlords be excluded from the scope of the new scheme.

The rationale for the proposal

4. What this appears to be all about is that for administrative reasons insurance companies treat landlords’ insurance policies as commercial lines and not domestic/consumer business. They are not looking at the end use of the property which is domestic/residential. They are also overlooking the end user i.e. the tenant who can be damaged more than landlords in the immediate aftermath by being displaced from their homes. Landlords are then unable to renovate the property if they do not have the flood cover with all the consequences outlined in this submission along with the loss of another property to rent. Government is concerned about the impact of long term empty homes and over time the exclusion of privately rented properties from Flood Re will increase their number in certain concentrated area where floods occur. As a result we will see abandoned and derelict properties, as well as blighting due to lack of investment.

Flood damage

5. We have to recognise that flood damage is costly to repair. Just making good the fabric of a house costs on average £25,000 to £30,000 per property. Flood claims are expensive so far as insurance companies are concerned; hence the temptation for insurers to avoid taking on this risk in those areas where experience shows flooding is more likely to occur. Nevertheless, we firmly believe that lack of availability of insurance cover in these areas has serious social and economic consequences which outweigh these considerations. Indeed, the creation of Flood Re recognises this but if you exclude PRS from the scope of Flood Re society will fail to achieve its overall economic and social objectives. This will be due to the exclusion of a significant number of residential properties. Privately rented and owner/occupied properties are inter mingled in the potentially affected areas. PRS properties are usually "pepper potted" and properties can move backwards and forwards between private renting and owner/occupation. Thus, it is difficult to predict the consequences should insurance not be available.

The purposes of insurance

6. There was an old advertising slogan for the insurance industry: "Get the strength of the insurance companies around you". If this proposal to exclude privately rented properties from the ambit of Flood Re goes ahead this will fly in the face of this old adage. Insurance is a proven way of spreading risk across the community to avoid it being concentrated on individuals who cannot then afford to make the resulting loss good. Likewise, it avoids expenses falling on the tax payer, whether national or local. Losses from flood have important consequences for the local communities where they occur, but these can be reduced so long as insurance cover is available. In turn Central Government usually has to step in to assist local authorities financially, so again if insurers absorb these losses this reduces the call on Central Government expenditure, as well. If the proposal goes ahead, resulting in the exclusion of a significant number of residential properties, then this mutual sharing of risk is lost, but as we demonstrate in the next section, it will then fall on many individuals who are unable to stand the significant restoration costs involved, as well as tenants who, importantly, will not be provided with temporary accommodation; nor will they be able to move back into the flood effected properties themselves, due to landlord’s lack of resources to carry out repairs.

The make up of the private rented sector

7. In many respects the PRS is a "cottage" industry. It is made up of the small landlords with one or only a handful of properties. These are not wealthy individuals who can stand the kind of losses involved should their properties be flooded. Indeed, most landlords are part timers renting out properties as a side line and they do not even make a profit from their rental activities. Financially, therefore, the vast majority are in no position to run the risk of making good flood losses should there properties be located in a high risk area. Therefore, why should they even think of investing in these areas, if flood cover is not available?

Non provision of flood insurance for rented residential premises - Flood Re

8. According to the Consultation Paper¹ "For properties to be eligible for Flood Re, they would need to be insured in the name of an individual, they would need to have been allocated a Council Tax band; be used for residential purposes; have an individual premium; and be occupied by the policyholder, or their immediate family".

9. This is an extremely disturbing development. We are seeking urgent clarification from Government on the scope of affordable insurance cover under Flood Re for Landlords of privately rented domestic properties. As we understand, from the above extract Flood Re may well not extend to private rented accommodation. We believe that this decision will leave landlords and tenants in flood affected areas vulnerable in a number of significant respects, as well as adversely impacting on flood resilience and community cohesion. We feel that failing to extend Flood Re to this sector is wrong.

10. Having been led to believe that landlords in the private rented sector would be covered, we are disappointed to see in the Government’s response to the consultation on the scheme that properties would be excluded where the owner does not reside in it. This would effectively exclude the vast majority of rented properties. This would mean landlords may not be able to obtain affordable insurance cover and that landlords would have to meet the full cost of any damage. Tenants will also suffer in consequence in a number of ways. We calculate that the recent Flood Re developments could negatively affect between 50 – 100,000 private rented properties in higher risk flood areas. This is on the assumption that 50,0000 properties are eligible for Flood Re and then looking at the relative overall size of the private rented sector.

11. The stipulation that landlords must live in the property shuts out buy to let and accidental landlords as well as larger scale landlords, as does the exclusion of corporate landlords of residential accommodation. Although cover will be available via Flood Re for landlords live in their rented properties they are the exception rather than the rule. The exclusion of the non resident landlord means that we are turning our back on a crucial provider of housing in the current climate where we have a chronic housing shortage.

Home owners and employment mobility

12. Again, there are many landlords who rent out their own properties and relocate who this will affect too. A social consequence of these proposals is that homeowners will be worried that they will no longer be able to afford to insure their homes if they rent it out whilst they pursue other career options in other parts of the country/world. This prevents employment mobility and restricts work opportunities. Alternately, those owner/occupier landlords who do rent out their properties will inevitably put their rents up to cover the extra cost of the insurance payments if Flood Re is not made available.

Impact on the PRS

13. This is very short-sighted proposal and negates the efforts that the Government is supposedly making to support private rented housing. Insurance may not be obtainable at all against flooding or only obtainable on prohibitive terms. Even if cover can be obtained at an increased premium then this will inevitably be built into the cost of renting in the affected areas. This will push up rents at a time when there is a great deal of concern around the cost of living. This could well have particular consequences for those tenants who are supported through housing benefits. With the cut backs in the levels of local housing allowance, in particular, this will mean that the rents may simply be unaffordable for the less well off tenants (including working tenants). It is a myth to think that somewhere or other landlords have a "pot of money" tucked away. Like any other business if the business is not economic because of high costs then landlords will not be able to afford to rent out properties.

Breach of mortgage conditions

14. For those landlords, such as buy to let landlords, who have a mortgage on the property it is a standard condition of the mortgage that insurance cover is maintained. Inability to access cover at all because of a growing exclusion of flood cover, will put these landlords in breach of their mortgage conditions. Since 2008 mortgage lenders have paid much greater regard to compliance with mortgage terms than perhaps they used to do in the past. Just paying your mortgage on time is no longer necessarily enough.

The blighting effect

15. Another predictable consequence for areas of higher flood risk where PRS properties are excluded from Flood Re is a gradual run down of these areas over time. This will become more and more perceptible as the years go on. Landlords will disinvest. Properties will be left empty and boarded up or "slum" landlords will move in. In this way the social fabric of the area will start to run down. This will have a knock on effect for owner/occupies. Should they want to sell landlords will no longer want to buy their properties which reduces the available market to them. Owner/occupiers themselves will become worried about abandoned or neglected properties due to landlords being unable or unwilling to invest in the area. Properties will not be repaired, even if they are still occupied. With increasing ability on the part of insurers to predict the outcome of flooding, due to better modelling, these areas will become more readily identifiable and better known. Not just social cohesion will break down in these areas but also economic well being, as well as reducing the overall resilience of the community to deal with flooding should it occur.

16. In the longer term this could result in a disincentive to invest in properties in higher risk areas prone to flooding as potential landlords feel that it is too expensive to insure the property or appropriate cover may not be available at all.

What happens when a flood occurs?

17. Insurance is not just about repairing the building. In the event of a flood insurance cover provides the cost of alternative accommodation. Companies provide temporary shelter for those affected. We need clarification on why the Government has failed to see that in the event of an emergency without including private landlords under Flood Re tenanted properties could well be uninsured, so under Homelessness legislation the burden to temporarily re house affected tenants will fall upon the Local Authority, who are already under huge strain. Insurance companies will not stand behind the tenants who live in uninsured properties in the way they currently do. It is therefore not just landlords who are affected.

18. Contrary to popular conception a residential landlord may well be under no obligation legally towards the tenant in the event of a flood due to a river overflowing. The normal repairing covenant implied into residential tenancies (see Section 11 of the Landlord and Tenant Act 1985) does not extend to damage by flood. The usual covenant for quiet enjoyment does not assist the tenant because a flood of the kind does not arise from the action or failure of the landlord. The rent may be suspended but this will not help the tenant to find re-housing. There is no specific obligation on the part of the landlord to re-house. Thus without an insurance company providing cover the tenant is left without protection. What the exclusion of private landlords means is that one vital party in any clear up operation will disappear off the scheme greatly reducing civil resilience in areas of higher flood risk if there are privately rented properties in the affected area

The tenant’s perspective

19. From the tenant’s perspective, they will often not know until it is too late should there be a flood that insurance cover is not available. They will then experience the resulting problems around the clean up. Tenants are therefore at risk in this way if availability of Flood Re is restricted in the manner proposed.

The aftermath of flooding

20. The result is that there will be properties left derelict after floods. Often already it takes a long time to carry out the necessary work. This will happen more and more. If landlords do not have the money then they will not be able to reinstate the properties. From the tenant’s perspective they will lose what could be their home and will have to find alternative accommodation, perhaps away from the area. For families, in particular, this would lead to disruption and could unnecessarily involve children having to move school.

The cost

21. The cost of restoring a rented property from the fabric perspective is no greater for a tenanted property than an owner occupied one and may well be less. Re-housing a tenant temporarily will cost no more than for owner/occupiers.

Treating landlords as a business

22. We have no problems, in principle, with landlords being treated as being in business; they should be and they are. However, on occasion (and this is one of them) a strict dichotomy between a business and personal is not appropriate. Importantly, you have to look at the actual usage of the property and the end users of the property. This is not, after all, just about the consequences for landlords. There are much wider considerations. Importantly, you have to consider the tenants because it is they who are displaced and have to move out whether temporarily or permanently. Lack of insurance cover may mean that their costs are not met or that they fall on the landlord who is in no position to pay them. There are much wider consequences for Society as a whole as well which we have already outlined. The Government have laid great stress on flood resilience. Excluding PRS will run very much counter to this principle because an important section of the community would be left without cover. There are also the long term physical fabric of the affected areas which we have already identified. All of these are extremely important issues which strongly suggest that privately rented properties, their landlords and their tenants, should be included within the scope of Flood Re.

23. We are worried that even small landlords (who may have between 1 – 5

properties) are being considered as a small/medium enterprise when in reality they are unable to absorb the costs of high insurance premiums like a social landlord would for example. Not including residential landlords under Flood Re is a mistake and will have detrimental effects of the local rental markets and housing provision in the PRS in higher risk flood areas.

The solution

24. We propose that there should be a clause added to the Bill that will oblige

participating insurers under Flood Re to provide cover for all domestic properties i.e. with Council Tax Band A to G irrespective of who owns the property or lives in it. This is the fairest way to ensure that affordable flood insurance is widely available without discriminating against the private rented sector, its landlords and its tenants.

December 2013

Prepared 18th December 2013