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Scottish Government consults on measures to improve
energy performance of existing non-domestic buildings

On 7 October 2011 the Scottish Government launched a consultation on measures to improve the energy performance of existing non-domestic buildings. The consultation (which closes on 20 January 2012) seeks views on proposals for regulations to be introduced under section 63 of the Climate Change (Scotland) Act 2009 ("the section 63 regulations"). This is a very significant development for the Scottish property industry. The Scottish Property Federation has recently reported that their Building Standards committee believe that implementation of the proposals could potentially result in costs to the industry in excess of £12.5 billion.

Background
The Sullivan Report, 'A Low Carbon Buildings Standards Strategy for Scotland', published in December 2007, made recommendations for improving energy performance and reducing CO2 emissions from existing non-domestic buildings.

Section 63 of the Climate Change (Scotland) Act 2009, which received Royal Assent on 4 August 2009, seeks to implement the Sullivan Report recommendations by requiring that regulations be made (a) providing for the assessment of the energy performance of existing non-domestic buildings and greenhouse gas emissions from such buildings; and (b) requiring building owners to take steps to improve the energy performance of, and reduce such emissions from, their buildings.

Proposals
Eligibility
Subject to certain exceptions, public and private buildings with a conditioned (i.e. heated and/or cooled) floor area greater than 1000m2 would initially be subject to the section 63 regulations. The consultation says that in future this area threshold may be reduced in steps to 500m2 and then to 250 m2, although no proposals are made for a timeline for doing so.

Trigger points
It is proposed that the trigger point for applying the section 63 regulations to a particular building would be sale, grant of a lease, or lease renewal. 

Exemptions
The following buildings would be exempt from the section 63 regulations:

• Buildings compliant with 2002, or more recent, building standards.
• As noted above, buildings with a conditioned floor area of less than 1000m2.
• Buildings with a limited life of less than 5 years including temporary buildings with an intended life of less than 2 years as defined in the Building (Scotland) Regulations.
• Buildings that do not use fuel or power to control the temperature of the internal environment. (This would include workshops and agricultural buildings with low energy demand and where the heating of buildings is solely for frost protection.)
• Buildings participating in the "Green Deal" to be introduced in Autumn 2012 under the Energy Act 2011. (This is a UK Government initiative under which the cost of carrying out energy efficiency measures to a building can be repaid by a building owner over a number of years through their energy bills rather than as an upfront capital cost.)

Assessment of Carbon and Energy Performance
The consultation proposes that all eligible existing non-domestic buildings would (at sale, rental or lease renewal) be subject to an "Assessment of Carbon and Energy Performance" (ACEP). This would consist of an Energy Performance Certificate (EPC); a "Recommendations Report"; and an "Action Plan". The ACEP would be prepared for the owner by an EPC approved organisation member. A new EPC would not be required if a valid existing EPC was already in place for the building. It should be noted that EPCs are not currently required on lease renewals, and the Scottish Government estimates that the likely average cost of obtaining an EPC for a building caught by the section 63 regulations will be around £2000.

It is proposed that the Recommendations Report would advise on a number of physical improvement measures to the building and would also advise that operational energy and CO2 emissions ("Operational Ratings" ("OR")) of the building be reported on annually by the owner, and that an OR certificate is fixed to/displayed at the building.

Action plan
A building owner would have the choice of either carrying out the recommended physical improvement measures to the building or undertaking to set up a protocol to report year on year ORs. The owner's choice of action would be recorded in the Action Plan which would include emissions reductions/energy performance improvements targets along with the timescale for the improvement measures. The consultation paper envisages that the person carrying out the ACEP (i.e. an EPC approved organisation member) would at key points assist the owner on decisions with regard to physical improvement work and reporting ORs.

Prescribed physical improvement measures
Under the proposals, where a building owner chooses to carry out physical improvement measures to the building, the Action Plan should outline eligible prescribed building fabric and services measures ("prescribed measures") to be carried out, together with implementation timescales. The eligible prescribed measures will be defined in the section 63 regulations and will include: upgrading heating controls; upgrading lighting controls; draught stripping to doors and windows; installation of insulation jackets around hot water tanks; installing low energy lighting; replacement of air-conditioning chiller units older than 10 years; replacement of boilers older than 15 years; and installation of insulation in accessible roof spaces.

It is proposed that the section 63 regulations will also allow Low and Zero Carbon Technologies ("LZCT") measures for improving energy performance and reducing emissions. LZCT include biomass boiler room heaters, air source heat pumps, ground source heat pumps, wind turbines, solar photovoltaic and combined heat and power.

Where the prescribed measures can be practically implemented, the building owner will be required to demonstrate how and when these are to be carried out to the building. Where none of the prescribed measures can be implemented or an insufficient number of them can be carried out to provide meaningful improvement to the building, the owner will be permitted to identify alternative building service or fabric measures to make up the shortfall in the emissions reductions target set when the initial ACEP was prepared.

Timescales for implementing measures in Action Plans
The consultation proposes that the period of time to undertake physical improvement measures outlined in an Action Plan should be 3½ years. In the Government's opinion three years is enough time in most cases for work which has to be carried out under building standards legislation, and the additional 6 months allows time for seeking any necessary consents.

For ORs, the proposed timescale to display the first OR would be 1 year from completion of the ACEP. The Scottish Government's view is that that timescale will be sufficient to allow a building owner to collect the required data. Building owners who choose to implement an OR reporting regime must continue to do so on an annual basis, unless they decide at some point to implement physical improvement measures. In that case, an owner would have 3½ years to carry out the work and would not have to go back to the OR reporting regime.

Incoming owners/tenants
The consultation proposes that where a building is sold and the new building owner does not wish to implement the physical improvement measures in the Action Plan triggered as a result of the sale, the new owner may prepare a new Action Plan. However, the measures indicated in the revised Action Plan must be completed within the period stipulated in the original Action Plan.

On the grant, or renewal, of a lease a building owner may choose to delegate the task of physical improvement measures or an OR reporting regime to the tenant. However, it is proposed that responsibility for compliance would still rest, ultimately, with the owner.

Enforcement
It is proposed that local authorities should be responsible for enforcement of the duties imposed by the section 63 regulations, and administer offences in relation to failure to obtain an ACEP, and that that would be part of the requirements of the regulations.

To assist enforcement authorities with their duties, the Scottish Government has announced the creation of a national database to register information associated with EPCs, ACEP's, and the Green Deal for non-domestic buildings. The database will be built, developed and maintained by the Scottish Government and the Energy Saving Trust. The Scottish Government proposes that from the beginning of April 2012 all non-domestic EPCs will be required to be lodged on the database.

What next?
The section 63 regulations will be drafted following, and taking account of, the outcome of the consultation. The Scottish Government's intention is to introduce the regulations by Autumn 2012 with a view to bringing them into force in 2013. The Scottish Government intends to hold a series of seminars for the property industry to publicise and explain the regulations.

The Scottish Government intends to carry out research to establish the extent of improvement of energy performance and emission savings which has resulted from the section 63 regulations. The consultation warns that should the extent of improvement be inadequate in the short and medium term, then a mandatory implementation of building improvement work is "likely to be introduced sooner rather than later". The Scottish Government predicts that full mandatory implementation would result in many building owners opting out of the Section 63 regulations by taking out a Green Deal, where financing schemes for improvements would be available. The Scottish Government sees such a scenario as being "welcome, as the eventual outcome in terms of upgrading (of the country's building stock) would be broadly equivalent".

Consultation documents
The consultation and related publications are available on the Scottish Government's website, at the page linked to below.

Click here for the consultation website.

The consultation (at pages 20-21) includes a useful flowchart which summarises how the section 63 regulations would apply to a particular building.

Click here for the consultation. 

English landlord and tenant case law update

Can existing guarantors under English
leases be obliged to guarantee assignees?
Ever since the Landlord and Tenant (Covenants) Act 1995 was introduced there has been an element of doubt as to whether a guarantor for a tenant could be obliged to guarantee the first assignee of the tenant it has guaranteed. In 2010 the case of Good Harvest Partnership LLP v Centaur Services found that the obligation contained in the lease requiring a guarantor to enter into an authorised guarantee agreement (AGA) was void and also that where the guarantor had in fact entered into an AGA its obligation in the AGA was also void due to, in both cases, the obligation offending against the anti-avoidance provisions in Section 25 of the 1995 Act.

A similar issue has recently been considered by the Court of Appeal in K/S Victoria Street -v- House of Fraser (Stores Management) Limited & Others. In this case a lease was granted with the tenant being guaranteed by its parent company. When the original tenant was to assign the lease to an assignee within the same group as the original tenant the court held the landlord could not require to the original guarantor to guarantee the assignee directly.

However, the court found that the landlord could require that the guarantor enter into an AGA guaranteeing that the outgoing tenant will guarantee incoming assignee's performance of covenants. Hence this mechanism is referred to as the "sub guarantee" solution.

The practical consideration for practitioners is whether the obligation to guarantee the tenant's guarantee should be contained in the original lease or the relevant AGA or in both. Landlords' solicitors are likely to adopt the belt and braces approach of requiring both.

Click here for the full judgement.

Breaking English leases
There have recently been a number of English cases relating to the exercise of break clauses in leases by tenants. Where the break option is on a fixed date, making a mistake in exercising it can mean the tenant is tied in to a lease for a number of years and thus makes it worthwhile for a landlord to litigate any potential ambiguity.

Many of the recent cases concern technical errors in the notices seeking to exercise the break, such as notices being given on behalf of the wrong group company tenant, or to the wrong landlord, or not in accordance with the lease provisions for giving notices.

Other cases concern preconditions to exercising the break. These can be "traps" for tenants. The most obvious trap is the precondition that tenants must have complied with all their lease covenants. Even small items of disrepair existing at completion can frustrate exercise. The pre condition that rents be paid up to date is another trap. One case features a break clause effective at calendar year end frustrated due to the December quarter rent (due on Christmas day) not having been paid by year end. The third usual precondition is that the tenant gives up vacant possession on the break date and it was this precondition which was the subject of litigation in the recent Court of Appeal case of NYK Logistics (UK) Limited -v- Ibrend Estates BV.

In this case the clause provided that the right to break was conditional on the tenant delivering up vacant possession on the break date. Two days prior to the break date the landlord and tenant were still discussing what works the tenant needed to do to remedy dilapidations, so on the break date the tenant retained the keys and was still in the process of completing the dilapidation repairs.

The court found that the tenant had failed to give vacant possession on the break date due to the continued presence of workmen and the fact that it retained the keys.

The court found, unsurprisingly, that vacant possession in this context would be the same as on a residential sale. On a residential sale, a purchaser wouldn't expect to pay the purchase price and open the front door and find the vendor's workmen carrying out works or find the vendor's three piece suite still in the living room.

Click here for the full judgement.

Contact us

If you think your business may be affected by any of the above, or if you have any other questions, please contact:

Gordon Aitken
Partner
0141 271 5747
gordon.aitken@mms.co.uk

Iain Macniven
Partner
0141 271 5763
iain.macniven@mms.co.uk