Property law specialist Alan Cook of Pinsent Masons, the law firm behind Out-Law.com, said that there was a danger that the plans could reduce the incentives for investing in commercial property in Scotland.
The Scottish Government has launched a consultation on new regulations that would implement Section 63 of the Climate Change (Scotland) Act. (44-page / 581KB PDF) Section 63 introduces the general compulsion to improve the energy efficiency of non-domestic buildings with a floor area of more than 1000m2 that are not constructed to 2002 or later building standards.
The trigger for improvement works to take place will be when commercial property owners wish to sell the property or grant a lease to a new tenant after the regulations come in to force. When either event occurs the property owner is required to provide the incoming owner or tenant with an Action on Carbon and Energy Performance (ACEP), which comprises an Energy Performance Certificate (EPC) and an 'action plan'.
The action plan must set out how the energy performance of the building is to be improved and how greenhouse gas emissions associated with that building are to be reduced. The EPC is a document that, amongst other things, provides an indication of the energy performance of buildings.
Under the Energy Act landlords in Scotland could be prohibited from letting proprieties that have a poor EPC rating from as early as 1 April 2015, whilst such a prohibition must be brought into force in England and Wales by April 2018 at the latest.
Whilst the Scottish Government is not obliged to bring in the prohibition, property law expert Rachel Oliphant of Pinsent Masons said that the ability for it to do so "provides an incentive for the property industry to ensure that Section 63 achieves its aims to prevent more onerous legislation".
Alan Cook urged the industry to respond to the Scottish Government's consultation on the draft regulations that have been proposed to implement the Section 63 provisions.
"There has been considerable consultation on how Section 63 might be implemented, and the difficulties involved in translating the policy objectives into workable reality is borne out by the complexity of the draft regulations," Cook said. "The exemptions from the Section 63 requirements will be key, but these have not yet been fully outlined, and this will no doubt be a key focus for consultees."
"The concern remains that the measures are being implemented at a time when the property industry, reeling from the turmoil of the last 5 years, is still toiling. In addition, the introduction of these specifically Scottish measures could cause Scotland to lose out in the competition for property investment decisions compared to other parts of the UK. I would urge the property industry to engage with the Scottish Government and continue to make its views known, to achieve a workable outcome," he added.
Under Section 63 energy improvement works can either be carried out within a set period of time - the Scottish Government's draft regulations propose 42 months - or the property owner can implement operational rating measures by recording and reporting on the operational rating for the building on an annual basis. If implementing the operational rating measures the property owner will need to display a valid Display Energy Certificate ('DEC') within the building in a prominent place showing the operational rating and asset rating for the building. The DEC must be issued by a qualified member of an approved organisation for that category of building.
"Whether the owner will have to carry out the works or whether it will be the incoming owner/tenant who will carry out the works will depend on the bargaining position of the parties," Rachel Oliphant of Pinsent Masons said. "We anticipate that the sale price or rent will be adjusted to take account of the works that need to be done which could potentially lead to a two tier market in Scotland."
"If using the operational ratings system the owner will need to record the data on the EPC Register on an annual basis so that the authorities can monitor progress," Oliphant added. "If the Scottish Government finds that energy consumption is not decreasing for properties monitoring their operational ratings they haven't ruled out introducing further legislation to make it compulsory to carry out energy efficiency improvements."
"Landlords will need to ensure that they have reserved sufficient rights under the lease if the landlord has opted for the operational rating measures to ensure they can gather the necessary information. If the landlord needs to carry out any energy efficiency measures specified in the action plan they will either need to carry out the works before the tenant goes in to occupation or reserve sufficient rights in the lease to carry out the works once the tenant is in," the expert said.
Oliphant welcomed the fact that the Scottish Government had set out plans to limit the scope of the regulations to exclude lease renewals and short-term lettings. The new regulations could however be a boost for the Government's flagship energy efficiency scheme, the Green Deal, she said. This is because properties in respect of which there is a green deal plan in place, and where payments are still being made under that plan, will be exempt from the Section 63 regulations.