Transactions involving large properties, such as hotels or office buildings, can trigger a requirement to improve the energy efficiency of the building. Notably, Scotland has to date followed a different path in relation to this area of regulation than England.
In general, the requirements in Scotland are less impactful than in England for two primary reasons. In Scotland, firstly, there is a “do nothing” option known as taking “operational rating measures” (although this still involves some cost) and, secondly, there is no prohibition on lettings of F or G rated buildings.
The current situation in Scotland
Which buildings are affected?
Any non-domestic buildings with more than 1000 square metres in floor area, which do not comply with the 2002 Building Regulations (“the Regulations”). This is because a building which is compliant with the Regulations will be treated as having adequate levels of energy efficiency. It follows that those which are currently affected are older, larger buildings.
When is the requirement triggered?
At any sale or lease of a building. Note that lease renewals or assignations of leases will not trigger the requirements. In addition, a sale by way of share sale would not trigger the requirement.
Who is affected by the obligations?
The seller/ landlord is under an obligation to provide an action plan to the purchaser/ tenant at no cost. However, the obligation to carry out energy efficiency improvements rests with the purchaser/ tenant.
What action is required?
This is determined by the action plan, which is prepared by a qualified assessor. An emissions saving target as well as an energy saving target are calculated by the assessor, derived from examining a fixed list of “prescriptive measures” as follows:
draught stripping windows and doors to reduce heat loss from unwanted ventilation;
upgrading lighting controls to include occupancy or photoelectric sensors if absent;
adding central timer controls to the heating system if absent;
adding installation to any hot water storage cylinder if uninsulated;
improving lighting and replacing low efficiency incandescent lamps where present;
improving insulation in poorly insulated roofs where roof space is accessible; and
replacing the boiler if more than 15 years old.
The assessor carrying out the action plan will identify which items on the above list are both (a) practicable and (b) will deliver a payback period of seven years or less (15 years in the case of boiler replacement). Having derived the targets on that basis, the action plan can either:
identify prescriptive measures which will deliver the target;
identify other measures (not on the prescriptive measures list) which could satisfy the target by different (cheaper) means; or
carry out “operational rating measures”.
Please note, operational rating measures is a somewhat misleading term. In effect, what it means is not carrying out any energy improvement works but, instead, carrying out an annual measurement of energy use and emissions and posting those annual results in a prominent place in the building. It might be regarded as the “do nothing” option, although clearly there is some cost in carrying out the annual audit.
What change is coming?
Assume more onerous regulation is coming
The current position should be regarded as relatively benign but is certainly not a permanent position. You should assume that there will be political pressure to compel improved energy efficiency in buildings – this will inevitably result in a need for capital expenditure to achieve those improvements.
Current Scottish Government policy
Current Scottish Government policy is to:
apply energy efficiency measures to all buildings by 2040;
achieve zero emissions by 2045 (this remains the case despite the abandonment of the earlier 2030 targets earlier this year); and
pursue their Heat in Buildings Strategy.
The precise method of regulation of energy efficiency improvements in existing non-domestic buildings is still in a state of flux and uncertainty.
It may be helpful to look at what has happened in relation to private rented sector residential properties, where:
A C rating is required unless not technically feasible or cost-effective;
there are exceptions for costs in excess of specified “cost caps”;
listed buildings have some exemptions;
exemptions can apply where it is not possible to obtain the necessary consents, including both statutory and from other landowners.
Possible move to MEES route?
While we can’t accurately predict how the regulations will develop in Scotland, it is entirely possible that Scotland will end up going down the English MEES (Minimum Energy Efficiency Standards) route, with the result that buildings with F and G ratings would be prohibited from being leased. The prohibition would likely gradually be tightened to prohibit lettings of anything with a rating less than B.
Such a prohibition of letting would affect the market because the lending market would likely be increasingly unwilling to lend on property which can’t be leased, since lenders would want the flexibility of being able to lease in an enforcement situation.
Accordingly, a prohibition of letting would impact the wider lending and sales market. If this change were to happen, it may result in a two-tier market developing in which buildings which are affected – or potentially affected – by letting restrictions would be increasingly starved of lending. This would create a market where property can be bought and sold only by cash buyers.
Certainly, we expect to see that the lending market will pay increasingly close attention to any new Scottish energy efficiency regulation developed for buildings of this size.