Well, now we know. The Scottish Government has long indicated its desire to reduce the country’s CO2 emission through greater energy efficiency and has been assiduous in providing carrots. Are we starting to see the stick?
One of the instruments in the drive to increase awareness and reduce unnecessary use of energy has been the Energy Performance Certificate (EPC). EPCs are now widely adopted and accepted in the commercial property sector.
But EPCs are just a measure. Other than the requirement imposed on vendors and landlords to prepare and provide EPCs, they have had no statutory teeth. There has been no element of compulsion on property owners to implement the recommendations contained within them.
From today (September 1st 2016), the Assessment of Energy Performance of Non-Domestic Buildings (Scotland) Regulations 2016 come into effect. These regulations follow-on from the Climate Change (Scotland) Act 2009 which contained provisions for ministers to bring forward regulations to compel landlords and proprietors to improve their properties.
It has to be said right away the new regulations, while adding to existing EPC regulations, are quite significantly limited in scope. They only apply to buildings, or separate units within them, with a floor area of more than 1000m2, which are being made available for sale or let.
To put this in perspective, the type of building likely to exceed 1000m2 is going to be the largest retail units, such as a High Street department stores, large industrial units, and warehousing and or commercial offices. Potentially, licensed and leisure properties such as hotels built over a number of floors might also be included, but to a lesser extent.
The other limiting factor is that the regulations apply only to buildings which do not comply with energy standards set out in Scottish Building Regulations from 2002 – so, modern property or property altered within the last 14 years may not be impacted.
This means only a small proportion of the current commercial stock – perhaps some 5% or so – will be affected. At the time of writing, there were something in the order of 500 – 600 properties of this size and over currently on the market for sale or let.
But this is a long game. There is provision for the policing of the implementation of the new regulations, backed up by fines, and I think we will almost certainly see a reduction in the size of buildings affected to 500m2 within four to five years – the blink of an eye in property terms.
And, while the initial numbers of landlords and property owners affected may initially be small, the ramifications for them could be costly.
Sellers will now have to have affected properties assessed for compliance to 2002 energy standards and where necessary have an Energy Action Plan prepared and act upon that plan. What is worthy of note is that the Action Plan attaches to the property in question rather than the person paying for it. There will be seven prescribed improvement measures which section 63 assessors can include, ranging from improving lighting to replacement of inefficient boilers.
There is another issue. With the action plan relating to the building, it could become a substantial liability for a seller, since the buyer will be obliged to do the necessary work. The implementation of the action plan may also fall at the door of tenants where their lease obligations require them to meet all statutory obligations relating to the property.
The changes will all cost money and they require to be implemented within three and a half years. So the clock is ticking as soon as the action plan is registered with the Scottish Government, via the EPC register. The property will then require reassessment to ensure compliance has been met.
An action plan can be deferred, but an owner taking this course will have to exhibit a display energy certificate (DEC), a newcomer to energy assessment in Scotland, with actual energy usage being measured and monitored on an annual basis thereafter. Continual measurement and monitoring will come at a cost, so the price of deferral will quickly outweigh the expense of actually doing something to the building.
DECs could be seen by some as energy compliance avoidance, rather than evasion, but the reality is that recommended improvements have to be done at some time. It may turn out that the most useful purpose of DECs will be in allowing implementation over a longer period to accommodate financial constraints.
The jury is still out on whether this will make properties unsellable, as owners take the view that the game is not worth the candle and go down the road of demolition rather than improvement – a situation already being factored in as a consequence of the changes in empty property relief.
There is certainly the possibility that asking prices will fall, as energy efficiency deficiencies become viewed in the same light as dilapidations, though now with a new statutory requirement attached. Similarly, we might see Landlords passing the responsibility of implementing an Action Plan onto tenants, insisting that tenants comply with all lease obligations.
Commercial agents will have to become acutely aware of how this will impact on marketability and value. But of this there is no doubt: a new regime of compulsion is well under way.
Mark O’Neill is a Commercial Valuations specialist and a Non-Domestic Energy Assessor at DM Hall Chartered Surveyors.