New energy performance regulations on commercial property

  • Insight

18 May 2016

New laws are coming into force in Scotland and England to impose additional responsibilities on owners of buildings in respect of energy performance and greenhouse gas emissions.

In Scotland the new regulations affect the sale or lease of affected non-residential property, while in England they only affect leases. The new Scottish regulations apply from 1 September 2016, while in England their new regulations come into force on 1 April 2018.

The position in Scotland

If you own non-residential property with an area of more than 1,000 square metres (10,763.9 square feet), the new regulations do affect you. If your property is 1,000 square metres or smaller, then you are not affected.

The Assessment of Energy Performance of Non-Domestic Buildings (Scotland) Regulations 2016 (SSI 2016/146) come into force on 1 September 2016.  Although Energy Performance Certificates have been with us since 2009, the 2016 Regulations impose additional obligations in respect of the sale and lease of commercial properties that have a floor area of more than 1,000 square metres (10,763.9 square feet), whether they are a self-contained building or part of a larger entity. 

The following buildings are exempt:

  • dwellings with their outbuildings and common areas etc are excluded,
  • property constructed in accordance with the requirements of Schedule 5 to the Building (Scotland) Regulations 2004 (which deals with requirements in respect of the structure, fire resistance, environmental, safety, noise and energy) or the Building Standard (Scotland) Regulations 1990 (which became effective on 4 March 2002),
  • a green deal improved property,
  • temporary buildings with a planned time of use of 2 years or shorter,
  • workshops and non-residential agricultural buildings with low energy demand.

The following transactions are exempt:

  • sale or lease of a property before construction has been completed. 
  • lease of property for not more than 16 weeks and which does not contain any option, right or obligation to extend the term to be longer than a total of 16 weeks, provided that the premises have not been let out during the previous 36 weeks.

Before selling or letting out a property, an “action plan” must be prepared and issued by a qualified person, following an assessment of the property’s energy performance. The action plan must:

  • contain a note of any measures to improve the energy performance of the property and reduce emissions of greenhouse gases produced or associated with the property,
  • include the energy performance target and the emissions target,
  • specify any recommended improvement measures for the property, and if there are none, this should be specified,
  • state whether or not operational rating measures are to be implemented in respect of the property and state the date of expiry of the compliance period.

The owner must complete any building improvement measures before the end of the compliance period, which is 42 months from the date when the first action plan is issued, of if later by the date when no valid display energy certificate exists, provided that there has been a valid display energy certificate since the action plan was issued and the plan states that operational rating measures are to be implemented.

Any improvement measures in respect of heating controls, insulation and low energy lighting should only be recommended if they would result in energy saving of more than the cost of the works at the end of a seven year period; it is not competent to require replacement of a boiler that is not more than 15 years old.

The owner is required to either make improvements to energy efficiency or to monitor and regularly report on energy consumption.

“Operational rating” is the energy consumption associated with the use of the property, expressed as a number. The energy performance target is the amount of energy by which it is estimated the consumption of energy would be reduced if the identified improvement measures were to be carried out. The emissions target is the reduction in the level of greenhouse gas emissions estimated to be achieved if the identified improvement measures were to be carried out. 

Once the improvement measures have been carried out, the owner must arrange for an Energy Performance Certificate to be issued together with a document confirming that the improvements have been completed, setting out the details of the property, a description of the measures taken, the date on which these were completed.

Deferral of works needed in respect of the action plan: If the action plan states that improvements are to be carried out, the owner can defer doing these works up to and beyond the 42 month deadline, provided he starts the reporting of annual operational ratings within one year after the first action plan is issued, and continues with this reporting by obtaining and displaying in a prominent place in the building itself a current “display energy certificate” for the property on an annual basis.

This certificate must satisfy various requirements set out in Regulation 11, and must show the energy rating, if any is stated in an EPC for the building. The certificate is valid for one year, and can be renewed year after year. An advisory report is prepared and issued in connection with the display energy certificate and includes information on improving energy performance and reducing greenhouse gasses.

Enforcement

The local authority has a duty to enforce the regulations and to impose a fixed penalty of £1,000 for failure to produce the action plan, but they are not allowed to impose a penalty for failing to provide a copy of the action plan, unless it has not been produced within 9 days after a request for it. The time limit for the local authority to impose a penalty is 6 months after it becomes aware of the breach. They must allow a minimum of 28 days for payment of a fixed penalty notice. 

The local authority may also impose a £1,000 penalty charge where it believes the owner has failed to carry out the building improvement measures in time. 

There is a right to have the penalty charge notice reviewed by the local authority, and after that there is a right to appeal to the Sheriff Court, provided the appeal is made within 28 days after the notice has been confirmed by the local authority. There are specific grounds of appeal set out in Regulation 26. 

There is a defence available under Regulation 23 if the owner can show that an action plan request was made at least 14 days before the request for information or request to view or issues a verbal or written offer to buy or lease, and despite all reasonable efforts and enquiries, it has not been obtained. 

There is also a defence in the case of a proposed lease where the tenant needs the premises due to an emergency that requires him to relocate urgently, and there is no action plan available and there was not enough time to reasonably expect an action plan to be obtained before letting out the property to the tenant; however, in such a case, the action plan must be obtained and given to the tenant as soon as reasonable practicable after the start of the lease.

The Position in England

The main thrust of the Regulations is that it will be illegal to let out a property that has an EPC rating of lower than E.

The main difference is that in Scotland, the regulations apply to sales and leases, whereas in England the relevant regulations only affect leases. The regulations are The Energy Efficiency (Private Rented Property) England and Wales Regulations 2015, (S.I. 2015/962) of which some provisions came into force on 1 April 2016, and others come into force on 1 October 2016. They actually bite as from 1st April 2018.

In England, all properties that have an Energy Performance Certificate will be covered by the Regulations, but leases of shorter than 6 months or for 99 years or longer are exempt; there are anti-avoidance provisions to cover the situation of the grant of successive six month leases. In England, there is no maximum period of a lease, whereas in Scotland, the current maximum term for residential property is 20 years, and for non-residential is 175 years. Sub-lettings and Assignments also come within the Regulations. 

There are exemptions for the following situations:-

  • where someone’s consent is needed for works to improve the rating (such as tenant, lender, planning authority, superior landlord or freeholder) and consent is not forthcoming,
  • if the energy efficiency improvements would result in a reduction of more than 5% in the market value of the property,
  • if all improvements that are available at no upfront costs to the landlord, such as via a green deal, were carried out, the EPC rating would still be below E. 

Regulation 27 prohibits the grant of any new lease or of an extension or renewal of a lease that starts on or after 1 April 2018, unless the property has an EPC rating of E or higher. In addition, any existing lease that is running at 1 April 2023 in respect of a property that has an EPC rating of lower than E cannot continue.