When the legislation was ﬁrst introduced, Energy Performance Certiﬁcates, commonly known as EPCs, came as a surprise for landlords, with many only undertaking energy assessments immediately before a sale or letting.
Energy Performance Certiﬁcates (EPCs)
EPCs are needed for almost all commercial premises over 50 sq m (538 sq ft): when newly built; after major refurbishment works; or when oﬀered to the market for sale or to let. There are various exemptions, including listed buildings, buildings with no heating system, and religious buildings. Failure to provide an EPC can result in ﬁnes. In Scotland local authorities can impose ﬁnes of 12.5% of the building’s rateable value, up to a maximum of £5,000, on a building owner and anyone acting on their behalf when marketing the property.
The Scottish Government introduced EPCs to comply with the Energy Performance of Buildings (Scotland) regulations 2008. The legislation catered for a phased introduction of EPCs from January 4, 2009. Initial regulation required assessment and availability of the EPC and the industry has now been working with this for approximately 10 years.
From September 2016, the legislation confers additional obligations on property owners in relation to the information which they are required to provide within an EPC and reassessment or additional surveys may have been required to update existing EPCs.
Section 63 Assessment
The most important element from the new requirements was the Section 63 Assessment, which was a new energy performance regulation that came into eﬀect in Scotland on September 1, 2016.
Owners of commercial properties in Scotland, with a ﬂoor area of more than 1,000 sq m (10,764 sq ft) which don’t meet the 2002 Building regulations had to produce an Action Plan to accompany the EPC when selling or leasing their properties. An Action Plan identiﬁes targets for energy and emission savings and clariﬁes what improvements can be made to the building to meet these targets.
Unlike similar regulations in England and Wales, the new Assessment of Energy Performance of Non-Domestic Buildings (Scotland) regulations 2016 does not prevent owners from leasing properties with poor EPC ratings. Instead, owners will have two choices when registering the EPC rating:
- Improve the building’s energy and emissions performance within 3.5 years of the date of the Action Plan.
- Defer action and monitor and report the building’s performance in an annual Display Energy Certiﬁcate.
The regulations currently allow landlords to defer action indeﬁnitely, but it is likely that they will be updated soon to stop the continual use of annual Display Energy Certiﬁcates. Both options come at a cost, but the aim is to encourage energy eﬃciency improvements across commercial properties.
There are a number of factors that those buying, selling or leasing a property should be aware of.
- Sellers must take into account the costs of improvement works or implementing measures when pricing the property. Although there is no requirement for the improvement measures to be implemented before the property can be sold, it is open to negotiation as to when the improvements are undertaken and at whose cost.
- If buying a property as an investment, the purchaser should consider if the current service charge provisions allow the landlord to recover the cost of improvement works or monitoring the property under the annual Display Energy Certiﬁcate.
- Landlords negotiating new leases should ensure that they reserve the right to carry out any Action Plan improvement measures and agree with any prospective tenant who is responsible for such works, however, ultimate responsibility of compliance rests with the landlord.
- Tenants are increasingly conscious of building eﬃciency and we envisage this is likely to be the biggest inﬂuence and incentive for creating more eﬃcient buildings.
This change is signiﬁcant and the transparency of Energy Performance is starting to have an impact on liquidity on commercial properties. It is now clear to prospective purchasers that energy related improvements (capital expenditure) may be required.
We are not yet recording a quantiﬁable impact on pricing with many vendors choosing to defer the implementation of Action Plans on older properties. We regard this as a ‘lag’ in reaction from certain elements of the market. Pricing may start to be adjusted accordingly for those properties falling below the required standard and vendors may begin to proactively improve energy ratings before considering a sale.
We would recommend this as it forms part of a well-advised preparation for sales process.