Matthew Aitchison, partner at Knight Frank Edinburgh, considers whether minimum energy efficiency standards (MEES) could be on the horizon for Scotland’s commercial landlords
AS Scotland continues on its journey to net zero, a great deal of focus has been placed on the introduction of a new Energy Performance Certificate (EPC) system from October this year. But, with those changes now on the backburner, another potential legislative development has come to the fore – and one that could be far-reaching, despite little fanfare to date.
Buried deep within Scotland’s draft Climate Change Plan: 2026-2040, in a single paragraph, the Scottish Government makes reference to plans that could see the introduction of minimum energy efficiency standards (MEES) for non-domestic (i.e. commercial) properties – a possibility previously thought to be off the table. If they are now being actively considered, that poses a number of questions for landlords, especially given the sheer diversity of Scotland’s commercial real estate.
MEES are exactly what the name suggests. They are rules that prevent landlords from leasing or selling properties that do not meet a certain level of energy efficiency. In England and Wales, where the legislation has been gradually introduced since 2015, buildings need to meet at least an EPC rating of E before they can be legally let, unless an exemption applies. There are also proposals to tighten minimum ratings to a C by 2027 and B by 2030.
In practice, the standards were introduced to force the owners of the least energy efficient buildings to invest in improvements that will bring them up to the minimum threshold. For the most part, that can be done by removal of polluting heating systems or upgrades to the property’s fabric, such as insulation.
At the prime end of the market, investors have already been pricing in the potential cost of upgrades – or lack thereof – for some time. Properties with strong ESG credentials have largely had greater liquidity and achieved premium pricing, given they are seen as future-proofed and unlikely to require substantial further investment in decarbonisation, refurbishment, or other works, as well as appealing to tenants (thereby reducing the re-letting risk) by meeting their own ESG agendas, and reducing service charge and running costs.
But, Scotland’s building stock is so varied that it will not be the same for every asset owner. For some – predominantly those with older, non-prime buildings where occupational demand doesn’t necessarily focus on ESG credentials (e.g. secondary or tertiary high street retail) – there may be a sizeable cost attached to factoring in future improvements to reach a minimum EPC level regardless of how it ends up being measured, with little ability to recoup the cost. After all, passing on the cost of upgrades through rental increases will be more feasible in some locations than in others.
Looking south, there is every chance the Scottish Government could set an even more ambitious target. While the UK Government’s response to the non-domestic private rented sector MEES consultation is yet to be published, it is likely to retain a minimum EPC B rating requirement with a deadline of 2035. That will probably set a precedent for other sectors, albeit with sufficient lead-times for landlords.
As property valuers, we ‘mark to market’. That means reflecting the behaviours of the stakeholders within the markets we value and, if there are further indications from the Scottish Government that it is serious about pursuing the introduction of MEES, that could mean undertaking valuations on the assumption that properties will need to meet or exceed an EPC of E, at minimum, and possibly higher in the years ahead, depending on how the EPC bar may be set.
In England and Wales, the expectation of legislative change has seen landlords scrutinise data, review their existing EPCs, identify non-compliant properties, and plan for and price in upgrades early to avoid potential volatility in the value of their properties. For assets to remain competitive, cost plans need to therefore be realistic about what is required and valuations need to be explicit in what they reflect.
With the Scottish Parliament election just behind us, the expectations are that the earliest a new EPC methodology could be introduced would be the second half of 2027. Nevertheless, once formalised, this would likely be the catalyst to pursue MEES in Scotland in the not-too-distant future – although this could be swayed by who the Scottish National Party (SNP) decide to work with on passing each piece of legislation, after failing to secure an outright majority in the recent election.
Ultimately, the direction of travel should become clearer once we have a fuller appreciation of the new Scottish Government’s policy agenda. But, for now, landlords need to consider the potential capital expenditure requirements they could face, building them into their asset plans for the years ahead.
