New energy performance regulations came into force on 1 September 2016 which will make Landlords consider carefully whether to lease or sell an existing commercial property.
The Assessment of Energy Performance of Non-domestic Buildings (Scotland) Regulations 2016 ("the Regulations") stem from Section 63 of the Climate Change (Scotland) Act 2009 which provides for regulations to be made for: (1) the assessment of the energy performance of existing non-domestic buildings and greenhouse gas emissions from such buildings; and (2) building owners to take steps to improve the energy performance of, and reduce emissions from, such buildings.
Under the new Regulations which came into effect on 1 September 2016, owners of commercial property are responsible for improving the energy efficiency of their buildings when they sell the property or grant a lease to a new tenant.
The new Regulations will apply to non-domestic buildings with a floor area of greater than 1000 sq m. (subject to a few exemptions).
Where the Regulations apply to the building, the owner must prepare an “Action Plan” setting out a programme of measures to improve the energy performance of the building and to reduce its greenhouse gas emissions. Action Plans will be prepared and issued by registered "section 63 advisors" following an assessment of the building. Where the advisor identifies a need for physical improvement measures to be carried out, these must be set out in the Action Plan which must be provided to a prospective tenant or buyer free of charge. The Regulations provide that any physical improvement measures shall consist of "identified improvement measures" (such as boiler replacement, installation of roof space insulation, and upgrading low energy lighting) which works must be completed within three and half years of the issue of the Action Plan.
The building owner may choose to defer the timetable for any physical improvement measures by arranging to measure, record and report energy ratings for the building on an annual basis. Building owners will need to obtain and exhibit a display energy certificate (DEC) showing energy consumption and emissions, and to renew it annually. Failure to comply with the Regulations could result in a £1,000 penalty charge from the Local Authority.
So who will pay for the cost of the works set out in the Action Plan? Although the responsibility for compliance will ultimately fall upon the owner of the building in question, it is fully anticipated that landlords will try and pass some of the cost and responsibility for carrying out the works onto their tenants. Heads of Terms for any new letting or sale may now make provision for who will be responsible for effecting and paying for the improvements in the Action Plan. Service charges may increase to cover the cost of implementing the improvements set out in the Action Plan. Dilapidation costs may increase where the tenants have failed to carry out energy efficiency improvements.
The requirement for an Action Plan is triggered only by the sale of the property or grant of a lease to a new tenant. No Action Plan is required for a renewal of a lease to an existing tenant. Although the full commercial implications for landlords and tenants have still to be seen, we may see the case for renewing a lease becoming stronger, with commensurate increases in the bargaining power of the tenant.
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