There is a lot still to do if Scotland is to meet its goal of achieving net zero in terms of greenhouse gas emissions by 2045. The buildings that we live and work in contribute a big proportion of Scotland's emissions, but it has become clear that the current energy efficiency requirements are not improving matters quickly enough. Here we look at the current regulations for non-domestic properties in Scotland, and what may be done in the future to move faster towards net zero.

First came EPCs

The Energy Performance Certificate (EPC) has been around since 2008 to rate the energy efficiency and environmental impact of a building. The size, layout, construction, services, occupancy and use of a building are analysed to produce an estimation of the amount of carbon dioxide (CO2) released from the building.

This measurement of CO2 release (the Building Energy Performance Rating) is graded on a scale of A – G, with A being the most efficient and G the least efficient.

There are currently no requirements for non-domestic properties in Scotland to have a minimum standard of EPC rating. However, a minimum energy efficiency standards (MEES) approach is already in force in England & Wales, where it is unlawful for a landlord to lease a non-domestic property which has an EPC rating of F or G.

Subject to certain limited exemptions, a seller or a landlord must exhibit an EPC when selling or leasing a non-domestic property to a new tenant and do so free of charge. Any EPC exhibited must be prepared by a qualified energy assessor and is valid for 10 years. EPCs are lodged on a central database.

EPCs have been criticised as being one-dimensional blunt instruments, which apply the same standards to widely varying types of properties. There are proposals for reform (see below) but the EPC is likely to be with us for some time yet as the Scottish Government sees them as the cornerstone of its push to improve the energy efficiency of buildings in Scotland. Indeed, the EPC is now being used by businesses beyond the pure regulatory requirement to obtain one, and there is evidence that buildings with higher EPC ratings are commanding higher rents, particularly when taken with occupiers' desire to meet their own energy improvement drives.

Then came Action Plans

EPCs don't require building owners to carry out improvement works to properties; they are simply advisory and there are no repercussions if owners do not upgrade their properties. However, EPCs are just the start.

The Assessment of Energy Performance of Non-Domestic Buildings (Scotland) Regulations 2016 require owners to meet certain additional requirements when selling or leasing. The regulations apply to non-domestic buildings with a floor area larger than 1,000m² (and units within buildings with floor areas larger than 1,000m² that can be used separately) which do not comply with the 2002 Scottish Building Standards.

Most significantly, the regulations require building owners to produce an action plan when a property is leased or sold and make it available to any prospective purchaser or new tenant free of charge.

An action plan lists the carbon and energy savings that a property will achieve if certain prescribed improvements are carried out. The improvement works that an action plan can require are listed in the regulations and include, for example, replacement of the boiler or upgrading to low energy lighting.

The owner of the property must then choose either to:

  1. carry out the proposed improvement works within 3.5 years of the date of the action plan; or
  2. defer carrying out the works and continue to monitor and formally report on the energy efficiency of the building annually.

The regulations don't apply when an owner is renewing or extending a lease with an existing tenant, or when an existing lease is being assigned. Short term lets of less than 16 weeks are also exempt provided there is only one such short term let per year.

Local authorities are responsible for enforcing the regulations. They have the power to impose a penalty of £1,000 if an owner fails to produce an action plan when required or fails to carry out the improvement works within the 3.5 year time limit.

What comes next?

As part of their Heat in Buildings Strategy (published in October 2021), the Scottish Government is seeking views on developing a new regulatory framework for improving energy efficiency in non-domestic buildings.

A call for evidence on the “Regulation of energy efficiency in existing non-domestic buildings” was released in December 2021, asking for views on 3 possible approaches to future regulation:

  • A measures-based approach

This approach would involve specifying a fixed list of improvements that should be made to a property to improve its environmental performance. Scotland already has a form of measures-based approach in place for certain properties under the regulations, so it may be reasonable to assume that any new measures-based approach would look to develop the regulations and increase the number and type of properties caught by their scope.

  • A minimum standards approach

This would mean setting a minimum standard for a property's environmental performance using a standardised measure, most likely linked to a property's EPC rating. It may become unlawful to sell or lease a property with an EPC rating below a certain level unless the owner makes improvements to bring the property up to standard. This may end up looking like the MEES regime currently in place south of the border.

  • An operational ratings approach

This may involve measuring the actual energy consumption and CO2 emissions of properties on a regular basis and then using those measurements to encourage owners to make improvements or change behaviours to increase environmental performance.

It's unknown which of these approaches the Scottish Government will eventually take. A further public consultation on the proposed options was to be published in late 2022, but this has not yet materialised. However, the Scottish Government has set a target of having the new regulations in force by 2025, so building owners will need to be mindful of the proposed changes to make sure that their properties remain compliant with legislation.

Contributors

Graeme Imrie

Senior Associate

Catherine Reilly

Director of Knowledge & Innovation (Real Estate)