New regulations under Section 63 of the Climate Change (Scotland) Act 2009 (the “Act”) are now fully in force and landlords of eligible non-domestic properties are now under obligations to contribute towards reducing Scotland’s greenhouse gas emissions. The potential costs and implications for commercial property transactions are significant and should not be overlooked.
As part of the international effort to tackle climate change, the Scottish Government has set targets for reducing Scotland’s greenhouse gas emissions by 42% by 2020 and 80% by 2050. As non-domestic buildings are responsible for a large amount of these emissions, Section 63 of the Act has introduced The Assessment of Energy Performance of Non-Domestic Buildings (Scotland) Regulations 2017 which places a duty on a number of commercial property landlords to assess and improve the energy performance of their buildings.
Section 63 came into force on 1st September 2016 and it applies to the majority of non-domestic buildings (or parts thereof), over 1000 square metres in area, that are placed on the market for sale or lease to a new tenant.
Alongside the existing requirement for an Energy Performance Certificate (“EPC”), a Section 63 Assessment is now compulsory for such buildings. The result of this assessment is the production of an Action Plan setting out carbon and energy savings targets that should be achieved if certain specified improvements and upgrade works are undertaken to the building.
The regulations set out seven standard prescriptive measures (improvement works) and the Action Plan places a duty on the owner to undertake all of those measures that are applicable to the building in question. The owner has a 42 month timeframe within which to complete the works and have an updated EPC prepared to complete the procedure and avoid enforcement action.
The seven prescriptive measures are:-
Installing draught stripping to windows and doors.
Upgrading lighting controls.
Upgrading heating controls.
Installing an insulation jacket to hot water tanks.
Upgrading to lower energy lighting.
Installing insulation in accessible roof space.
Boiler replacement if over 15 years old.
At first glance these works may not seem unduly onerous, however, costs can become significant for larger buildings.
It is possible to negotiate alternative improvements in lieu of the “prescriptive measures” as long as they still achieve or exceed the initial savings targets set out the Action Plan. This may be beneficial to an owner if they already have upgrade works planned for the building or if less expensive works are possible.
Owners have an option to defer implementation of the works by recording the current operational ratings of the building through a Display Energy Certificate (“DEC”), however, these certificates must be updated annually for as long as the owner wishes to delay. If there is any failure to update the DEC timeously then the owner will revert automatically to having to complete the works. Whether to opt for the DEC deferral route will likely be determined by comparing the long term annual DEC assessor fees and the need to update against the actual cost of the works.
Whilst there are some minor exclusions to a building having to undergo the Section 63 procedure – the age (and current energy efficiency) of the building and type of transaction - these regulations must be a factor to be carefully considered when planning any sale or lease of an eligible commercial building. As a Section 63 Assessment is triggered by a sale or lease it is probable that issues will arise concerning liability under a commercial lease and, in relation to sales, the Action Plan impacting on the value of the building – prices may have to be adjusted!
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