Concerns with s63 Energy Regulations for Scotland

The Assessment of Energy Performance of Non-Domestic Buildings (Scotland) Regulations 2016 (“the s63 Regulations”) came into effect on 1 September 2016.

These are effectively the Scottish Government’s alternative to the ‘Minimum Energy Efficiency Standards’ (MEES) which are due to come into effect in England & Wales in 2018. In similar vein to MEES, the s63 Regulations pose investment management considerations at the point of acquisition, throughout the leasing cycle, and when preparing for a sale. However, whilst the s63 Regulations similarly target the energy performance of existing properties at the point of a transaction, there are significant differences to MEES in terms of regulatory scope, triggers and the resultant obligations.

Summary of the s63 Regulations

The Regulations apply to the owners of buildings which have a floor area in excess of 1,000m² (on a Gross Internal Area basis) and which are being offered for sale or for rent to a new tenant on or after 1 September 2016.
Buildings and building units (i.e. a separate lettable area) with a GIA of 1,000m² or less are out of scope, although there is a possibility that the floor area threshold will be reduced in the future.
Where the property to be offered for sale or let is defined as a building unit (meaning part of a non-domestic building that is designed or altered to be used separately, such as a retail unit within a shopping centre), it is the area of the building unit, not the whole building, that is relevant when determining whether or not the Regulations apply.
Similarly, buildings that were constructed in accordance with Building Regulations prevailing from 4 March 2002 onwards are out of the scope of the regulations; the aim is to target older buildings which did not have to be built in accordance with modern energy efficiency standards.
Unlike the MEES Regulations in England & Wales, and because of the link to the Building Regulations standard to which the building was constructed, the Regulations in Scotland are not triggered by a minimum threshold of energy performance based on their EPC rating.
The renewal of a lease with an existing tenant does not trigger the regulations. Short-term leases (less than 16 weeks) are also exempt in certain circumstances.
Where the Regulations apply, building owners are required to produce an Action Plan prior to marketing the property. This must be prepared by an accredited “Section 63 Advisor”.
The building owner then has the option of either improving the energy and emissions performance of the building within 3.5 years of the date of issue of the Action Plan, or deferring that improvement in lieu of formally reporting annual energy use by way of an annual Display Energy Certificate (the first of which must be in place within twelve months of the date of issue of the Action Plan).
Compliance with the Regulations is the responsibility of the building owner; in the event of a sale, any obligations under the Regulations pass to the new owner. Unlike the MEES Regulations in England & Wales, there is no obligation to implement improvements prior to a transaction taking place.
The Action Plan must be made available to prospective buyers and tenants when marketing a property (in the same way that EPCs must be), and a copy provided on conclusion of the transaction.
The completion of improvement works needs to be formally recorded in the form of an updated Action Plan and a new EPC which confirms the rating of the improved building.
All documentation associated with these Regulations (i.e. the Action Plan, the EPC and the DEC) must be lodged on the central register by the relevant advisor/assessor.
The Regulations do not replace or alter the requirement to have a valid EPC in place for newly constructed buildings or for buildings being sold or rented to a new tenant under the Energy Performance of Buildings (Scotland) Regulations 2008; they continue to apply. However, there are significant and unhelpful consequences relating to the incompatibility of existing EPC data with the Action Plan requirements of the Regulations.
Enforcement of the Regulations will be the responsibility of the local authority for the area in which the building is situated – the same as for the arrangements currently with respect to EPCs in Scotland. Penalty charge notices with a fine of £1,000 will be issued for each case of non-compliance, with penalty charges levied retained by the enforcing authority.

Aside from creating altogether different regimes for regulating the energy performance of existing non-domestic property in different parts of the UK, there are a number of specific issues which threaten to undermine significantly the effectiveness of the s63 Regulations which is cause for major concern. In particular, we think that the two issues described below are worthy of highlight.

Incompatible systems

Where there is a requirement to produce an Action Plan under the Regulations, a specific software solution, embedded into the latest version of iSBEM, must be used to determine the appropriate improvement measures. However, to date, none of the leading proprietary software solutions that are commonly used to prepare EPCs (e.g. IES, DesignBuilder) have developed an interface for this new solution. Some have unspecified plans to rectify this, whilst others do not intend to do so at all due to the relatively small size of the Scottish market.

The consequence of this regulatory stipulation is that the modelling outputs used to underpin many existing EPCs will not be compatible with the Regulations. This is an absurd, and presumably unintended, consequence; it renders many existing EPCs obsolete in the context of the s63 Regulations. As things currently stand, this means that replacement EPCs will need to be commissioned for many assets for which an Action Plan is required.

These new EPCs will need to be produced in iSBEM which is a basic application more prone to human error. The modelling process can be improved through a proprietary graphical interface known as G-iSBEM, but EPCs produced in this way are limited to SBEM and far less useful from a design and energy management perspective than those generated by the more advanced proprietary systems, which can use both SBEM and a more rigorous dynamic simulation methodology (DSM). For more complicated buildings, the replacement EPCs may require considerably more modelling time and, therefore, cost a lot more to produce than would normally be the case. This is because iSBEM requires users to manually calculate and enter surface areas for every room (walls, floors etc.) and as there is not a graphical (3D) interface, it is easy to make mistakes as one cannot visualise these areas. This means that iSBEM is not geared up for complex geometries and zones.

Clearly, this absurdity means not only that EPCs prepared in Scotland going forward are likely to be less accurate than they otherwise would be, it also adds an additional cost and administrative burden for building owners that need to comply with the Regulations. It is likely to further disenfranchise market actors from the wider Energy Performance Certificates regime, which is already viewed by many with a considerable degree of scepticism.

Inconsequential penalties

The Regulations place a duty on all local authorities in Scotland to enforce the regulations within their respective administrative boundaries. In essence, their powers extend to the issuance of fixed penalties of £1,000 for non-compliance in the event that:

an Action Plan is not provided to a prospective purchaser or tenant within 9 days of a request for it; and
building improvement measures set out in an Action Plan have not been implemented in time.

The time limit for the local authority to impose a penalty is 6 months after it becomes aware of the breach. They must allow a minimum of 28 days for payment of a fixed penalty notice. Rights of appeal and bases for defence are also set out in the Regulations.

Notably, the Regulations appear only to provide for penalty notices to be levied on a one-off basis (although worth noting that penalties can be charged under two separate scenarios; one for not having made the action plan available when selling or letting, as well as for not implementing the improvement measures within the Action Plan).

This would mean the cost of the penalty may well be significantly less than the cost of procuring a replacement EPC where one is required, preparing an Action Plan and implementing improvement measures. However, given that the trigger for the regulations is transactional, it is likely that the Scottish government holds the view that not having the appropriate documentation in place when offering a property for sale or lease may have a negative effect on a potential transaction, and that prospect would be sufficient to deter non-compliance, at least in respect of the requirement to have the Action Plan in place at the point of marketing.

That being said, the enforcement provisions do seem, in our opinion, to be very soft. We would not be surprised if a number of asset owners elect to take the risk of a fine, rather than comply with their legal obligations. Time will tell how the market responds, and indeed what moves the Scottish government might make in the future, if any, to address ineffectual aspects of the regulations as they are observed.

Our call

In light of these issues, Hillbreak calls on the Scottish government to move quickly to correct the unintended consequences of the s63 Regulations, or risk causing significant and unnecessary frustration to the effective working of the property market, not to mention being ineffectual in achieving the policy objectives. In the meantime, Hillbreak will continue to support and advise its UK property clients on the requirements and implications of the s63 Regulations.