For properties in Scotland we have passed the six-month mark since the introduction of new EPC regulations made under Section 63 of the Climate Change (Scotland) Act 2009, yet many investors remain unsure about what a poor EPC rating means for their asset.
The new Scottish Energy Efficiency Programme (SEEP) regulations have been compared to their England and Wales counterpart, Minimum Energy Efficiency Standards 2018 (MEES), but there are significant differences both in terms of the process for ensuring a building is compliant and what action is required by building owners going forward.
Section 63 v MEES
Introduced on 1st September 2016, owners of large non-domestic buildings in Scotland are now required to produce an Action Plan which identifies emissions and energy improvement targets and what building improvement work will be required. The regulations apply to buildings over 1,000 m² and their application is triggered by the sale of a building or by rental to a new tenant.
Buildings are exempt if they are less than 1,000m², subject to a lease renewal or short term letting, or if they meet the specified energy performance standards of the Scottish Buildings Regulations 2002.
Under a sale, new owners will inherit the Action Plan and the responsibility to improve the building passes to the new owner. The Action Plan can be reviewed and amended to change some of the provisions.
Owners can either carry out the improvements within three and half years or defer the improvements by reporting annual operational energy use via Display Energy Certificates (DECs).
If the building owner decides to carry out the improvements, they can either adhere to a list of prescribed measures which includes heating and lighting controls, draught stripping, hot water storage insulation, lighting, boilers and roof insulation, or implement their own alternative measures such as renewable energy solutions which would have the equivalent savings to carbon emissions and energy improvements.
This differs significantly to the proposed MEES legislation coming into effect in England and Wales on April 1st 2018.
South of the border, the MEES legislation will mean that a building cannot be let on new lease and the lease can not be renewed, if the EPC rating is an F or G but only if an EPC is already in place. Listed buildings will be exempt if no EPC has been lodged previously. There are also a list of exemptions relating to cost effectiveness and consent which do have some cross overs with Scottish legislation but the main difference is that in Scotland a building can still be let if it has an F or G rating.
The F and G issue
Unlike in England and Wales, the question for Scottish buildings therefore does not relate to what EPC rating the building requires before the marketing of a property can take place but whether it requires an Action Plan to accompany it.
As EPC providers for clients with buildings in Scotland, Braithwaite Energy have produced a wide range of ratings, several of which were F or G rated, in the last six months but because the buildings fell outside of the scope of the new legislation ie they are less than 1,000m², they did not require an Action Plan and the sale or new lease could proceed with the current EPC regardless of the rating. They have also carried out compliance checks for buildings that are built before 2002 and found that they are in fact compliant and did not therefore require an Action Plan.
Braithwaite Energy and Workman have been involved in the sale and letting of properties which require an Action Plan and have found that the best approach is to establish what route to compliance the building owner wants to adopt before moving the process forward.
For sales, clients often prefer to adopt the DEC route as this means that any new owner will inherit the building without the clock ticking for the required improvements to take place.
For situations where building owners are planning to hold their asset and create new leases, clients are more inclined to explore the improvement route as this removes the burden of annual DEC reporting and can often tie in well with planned refurbishment works.
Whichever route has been adopted, there is scope to review and amend the Action Plan once it has been lodged.
The Action Plan process
Taking the process forward, Braithwaite Energy and Workman propose the following checklist when preparing for sale or a new lease in Scotland.
1. Check if an EPC is in place for the building or unit by going on the Energy Saving Trust website www.scottishepcregister.org.uk
2. Check the floor area of the building – Total Usable Floor Area in square metres – exempt if under 1,000 m²
3. If over 1,000m², check if a Building Warrant is in place stating that the building was built to Scottish Building Regulations 2002 – exempt if built to these standards
4. If over 1,000m², instruct a qualified Section 63 Assessor to run a compliance check ie. check if the building is compliant with Scottish Building Regulations 2002
5. If non-compliant, commence the Action Plan process.
NB: Historic EPC files can be obtained from the Scottish Register and used for the Action Plan but it will be the responsibility of the assessor to verify that the data is accurate.
So what does all this mean for building owners?
There has been much debate on whether the Scottish legislation is more onerous than the anticipated England and Wales version but in terms of the ‘F&G issue’, this is effectively removed in the Scottish situation.
Yes, perspective tenants might look to occupy more energy efficient buildings and may therefore look at the EPC rating but this will be along with a whole host of other considerations. Similarly, a potential purchaser may look at a poor rating and believe that an occupier may use that in future lease negotiations but again there are several other factors that will influence the process.
When carrying out portfolio reviews for clients the approach and advice has therefore differed depending on whether the building is in Scotland or England and Wales. However, the objective often remains the same and that is protecting the value of their asset, as one of the main concerns being that a poor rating may lead to expensive remediation and reduction in asset value.
This is often not the case but due to lack of information regarding the EPC, investors have been put off by assets with an F or G ratings.
On both sides of the border, we know of several sale transactions that have failed to complete due to an F or G rating but for Scottish investors, the environment is now one of encouragement to consider improving the energy efficiency of buildings rather than ensuring their building is of a certain EPC rating.
Investment decisions can therefore still be made by sellers and purchasers regardless of the EPC rating but more upfront consideration is required as to the Action Plan process and what route to adopt going forward.
We therefore advocate the involvement of a qualified Section 63 Assessor as early as possible in the sale and letting process and before any refurbishments take place to ensure that the best approach is adopted.
This article was produced in conjuction with Richard Braithwaite of Braithwaite Energy. Visit braithwaiteenergy.co.uk for more information.