With new environmental, social and governance rule changes coming into force in England and Wales this month, it is worth evaluating what this means north of the border, where these rules do not apply.
Although in many respects the EPC requirements for commercial properties in England and Scotland are similar, there are some significant differences that might potentially give Scottish investors a competitive edge.
By exploring the key features between England and Wales’s EPC regime together with the imminent changes, it’s possible to pinpoint what this means for investors and developers on both sides of the border.
When is an EPC necessary?
All UK nations require an EPC on the construction, sale or lease of a building, but when it comes to lease assignments, this does not trigger a requirement for an EPC in Scotland.
When a building is refurbished in Scotland, there is no requirement to update the EPC. However, in practice, most owners would update it as they would expect the rating to improve. Yet, in England, refurbishment will often trigger a requirement for an updated EPC, meaning that for leases and refurbishments, England and Wales have an additional hoop to jump through.
Display energy certificates
In line with the UK government’s ambition to reduce greenhouse gas emissions, DECs – a certificate designed to show the energy usage and performance of a public building – now have an important role to play.
In England and Wales, public authority occupiers of buildings (with a total useful floor area of over 250 sq m that are frequently visited by the public) must display a DEC in a prominent position – something not required in Scotland. However, one may be required if the owner has chosen to report operational ratings rather than carry out improvement works.
This DEC requirement is in addition to the obligation to display an EPC, which applies both north and south of the border to certain buildings frequently visited by the public.
The EPC rating
We can see a crucial difference when evaluating the requirements and ratings of the separate EPC regimes in Scotland and the rest of the UK.
A different calculation methodology is used in Scotland for EPCs compared to south of the border, meaning that EPC ratings in England and Wales cannot be directly compared with those in Scotland.
It is important for investors and lenders to appreciate that a D rating in one jurisdiction does not directly equate to a D rating in the other, so it is necessary to discuss what the rating means with an EPC specialist in that jurisdiction and what can then be done to improve it (if improvement is required or desired).
Consequences of the EPC rating
In England and Wales, from 1 April 2023, landlords became, subject to some limited exceptions, unable to continue to lease commercial property that has an EPC rating lower than E.
Since the Minimum Energy Efficiency Standard Regulations do not apply in Scotland for commercial properties, there is no prohibition on Scottish commercial property owners letting buildings irrespective of the EPC rating.
Instead, where the Assessment of Energy Performance of Non-Domestic Buildings (Scotland) Regulations 2016 apply when an owner wishes to sell or let its building, it must provide the prospective buyer or tenant with an “action plan”. This generally applies to commercial buildings and building units with a floor area greater than 1000 sq m that do not meet the Scottish Building Regulations from 2002 or later.
An action plan identifies emissions and energy improvement targets for the building, while also setting out the improvement measures required to meet those targets. Where an action plan is required, owners must choose either to carry out the improvements or to defer improvement by formally reporting annual energy use (operational ratings).
In practice, many landlords choose to implement the operational rating measures rather than undertake work to improve the energy efficiency of the building. Therefore, they are only obligated to annually report the operational ratings for the building and to obtain and exhibit a DEC in a clearly visible place in the building.
This allows landlords to continue to let properties with a low or very low rating without incurring the expense of bringing the property up to the ratings required to lease or continue to lease in England. As a result, this not only gives investor landlords in Scotland a competitive edge, but a substantial financial benefit.
What’s next?
Despite all of this, any Scottish advantage could be short-lived. The Scottish government has stated that it is committed to developing a new regulatory framework for zero emissions heating and energy efficiency in non-domestic buildings.
At the moment, it is not clear whether this will involve new regulations, and possibly minimum energy efficiency standards similar to England, or a tightening up of the AEP Regulations. However, a consultation on the new regulatory framework is expected shortly. A new EPC regime for Scotland is also anticipated once the outcome of the Scottish government’s consultation is known.
While we do not yet know what the changes might entail, Scottish investors would be well advised to start taking steps to improve the energy efficiency of their buildings sooner rather than later as the new regime will certainly be a more, rather than less, stringent one.
Chris McLeish is a partner in the real estate & infrastructure team at Morton Fraser
