Is the Scottish property market ready for new energy performance changes?

Philip White
Philip White

By Philip White, Partner for Energy and Sustainability Services at Malcolm Hollis LLP

THE clock is ticking down to 1 September when the Assessment of Energy Performance of Non-Domestic Buildings (Scotland) Regulation 2016 comes into force.

The Scottish Government is implementing this new legislation to improve the energy performance of non-domestic buildings throughout Scotland. The regulations set out requirements on building owners for the assessment and improvement of the carbon and energy performance of their existing non-domestic buildings.

There are certain exemptions, however in most instances, if the building is greater than 1000m2 and constructed pre 2002, an Action Plan will be required by the property owner detailing potential energy performance improvements before the property can be sold or let to a new tenant.

The Action Plan sets out energy and emission improvement targets and the measures required to meet those targets. The Action Plan must be available to prospective tenants or purchasers when the building is marketed.

Property owners can action the suggested improvements or alternatively defer the work by producing a Display Energy Certificate (DEC).

Both the Action Plan and the DEC will be stored on an electronic register which can be searched by any member of the public. An EPC will still be required as before. This approach to energy performance legislation seems more sensible than the English equivalent. It is still a landlord responsibility but by linking requirements to the Display Energy Certificate rather than the EPC, there is a clear visibility to operational performance of a building. As a result, both landlords and tenants are focused on a common energy performance goal.

Initial compliance requirements are relatively light touch at the moment but the Scottish Government has indicated this will be made more stringent as time goes on.

Despite the seemingly low impact, landlords would be wise not to overlook the new regulation and should prepare a strategy to collaborate with tenants.

The new regulations are likely to have an impact on the value of properties. For instance, the Action Plan will include a detailed break-down of the required improvement measures, which may be readily costed and used by a savvy buyer to negotiate a lower purchase price.

If a rental property cannot be let its value will decrease by approximately the cost of the required improvement measures.

The loss in value could be significant to the landlord particularly if substantial works are needed. The landlord may also incur a loss of rent if the premises remain vacant while the works are carried out.

Owners with corporate commitments to lowering energy use and carbon emissions are more likely to carry out the improvement measures detailed in the Action Plan and the DEC because the detail of such commitments is publicly available.

Potential issues could arise between landlords and tenants. The Action Plan may give tenants a stronger position to negotiate a lower level of rent or more favourable lease terms.

Carrying out the improvement measures is likely to be problematic in buildings where there is substantial tenant fit out. Some improvement measures may require works to the base build but other measures may involve alterations to the fit out. With this there may be issues in co-ordinating the improvement measures or negotiating which party will carry out the works. In such cases, the landlord and tenant may want to use the regulations delegation protocol to enable the tenant to implement the improvement measures.

Generally, repair covenants only require tenants to restore the premises to the condition they were in at the start of the lease.

However, if reinstatement work is required to the building it must comply with building standards.

It is possible the work carried out by the vacating tenant will capture the improvement measures required under the Action Plan and reduce the amount of work for the owner to achieve the targets set out by the plan.

So, whilst the initial impact of the requirements is limited in scope, the measures will bring greater focus to energyperformance and the carbon emissions in existing commercial buildings for both landlords and tenants.

Now is the time for us all to start engaging with the trend for greater energy performance.