Sustainability - it's no revelation that it has been high up on the agenda of the Scottish real estate industry for some time. See our recent blog here on green lease trends. Against that backdrop has come an increasing focus on Service Charge – which you can read more about here.
Most landlords will now be well versed in the requirement to produce an Energy Performance Certificate (EPC), and in certain cases an Action Plan when marketing a property to a prospective tenant, but the obligation doesn't end there.
A particularly hot topic and one which we are frequently seeing tenants push back on is costs pertaining to recommended improvement measures identified within an Action Plan for a property.
What is an Action Plan?
From 1 September 2016, section 63 of the Climate Change (Scotland) Act introduced regulations - the Assessment of Energy Performance of Non-domestic Buildings (Scotland) Regulations 2016. These regulations require the assessment and improvement of non-domestic buildings with a floor area of more than 1,000 m², or units within those buildings which are designed to be used separately, which also have a floor area larger than 1,000 m².
Some exemptions apply:-
- Properties that have met or exceed the equivalent energy standards of the 2002 Scottish building regulations.
- Temporary buildings (intended life of no more than 2 years).
- Workshops and agricultural buildings meeting the “low energy demand” rule.
- Buildings participating in the Green Deal scheme.
- Prisons and young offender institutions.
The Action Plan, if required, identifies opportunities for carbon and energy performance improvement, as well as outlining how these could be implemented through physical improvements to the property. The owner and any subsequent owner must either (a) complete the works within 3.5 years of the action plan being produced, and on completion, a document of confirmation of improvement must be registered and a new EPC obtained; or (b) undertake operational ratings and an annual survey monitoring energy performance.
How does this impact Landlords and Tenants?
Sustainability provisions will govern who's liable for the cost of improvement measures – now commonly a topic of discord in lease negotiations.
In an ideal world from a landlord's perspective, where an action plan is required for multi let properties, the leases will provide for an ability for the landlord to recover the costs of carrying out improvement measures to the common parts from the tenant. Service charge provisions, if applicable, should be framed accordingly so as to include works required to implement improvement measures within the scope of recoverable service expenditure. See more details here on service charge trends.
If acting for a landlord, rights of access should be reserved to ensure that entry to the premises can be taken for (i) inspecting the premises for the purposes of preparing an EPC or action plan and to review environmental performance and (ii) carrying out improvement measures to the premises or to the common parts. Landlords will also want to ensure that any improvement measures insofar as they apply to the lease premises (as opposed to the common parts) will be carried out and paid for by the tenant irrespective of whether the lease terminates before or after the date on which the works require to be completed under the regulations. It may not always be appropriate or realistic to expect the tenant to meet such costs and consideration may require to be given to alternative arrangements depending on the circumstances.
For those properties smaller than 1000 m² or otherwise exempt, the position is more of a grey rather than green area. It is important however to not disregard sustainability clauses just because an action plan at present isn't required for that particular property. Typically, rather than the inclusion of onerous detailed sustainability provisions parties tend to agree on wording intended to facilitate a discussion between the parties about these issues – the 'agreement to co-operate' clauses.
While a generic code to sustainability might seem like an appropriate way of ticking boxes today, a woolly approach may cause issues in the future should the regulations change and buildings less than 1,000 m² are caught out. While carrying out the measures or improvement works identified in an action plan can be delegated to a tenant, ultimate responsibility for compliance with the regulations rests with the building owner. Some degree of future proofing should be considered to ensure that, if recommended improvement measures are identified, there is a mechanism in the lease for these to be implemented.