HM Insights

Energy Performance Regulations – due diligence and contract solutions for buyers and sellers

The succinctly named Assessment of Energy Performance of Non-domestic Buildings (Scotland) Regulations 2016 became law across Scotland on 1 September 2016.

We reported on the regulations previously, but how are the affecting the way people deal with affected properties?

Energy Efficiency Action Plan Asssessment Of Energy Performance

A variety of clauses and due diligence enquiries are emerging to give comfort to buyers on measures taken by sellers to comply with the regulations or to assure buyers that no action needs to be taken.

Do the regulations always apply?

In certain circumstances, no Action Plan is required to meet the regulations. That depends on two things.

Firstly, do the Regulations apply? They only affect buildings over 1000m², where the building warrant was applied for before March 2002.

Secondly, as part of the official guidance on the Regulations, the Scottish Government issued a set of FAQs including one on how to treat a building that was marketed for sale before 1 September 2016 and that marketing continued after that date. If that applies, the regulations are not triggered and no Action Plan is required. Note that if, at any stage, the relevant property ceased to be marketed and then there was a marketing relaunch after 1 Sept 2016 that triggers the requirement for an Action Plan. Continuous presence on a website has, in our experience in recent deals, satisfied the requirement.

What happens when they do apply?

If the regulations apply, then an Action Plan must be in place setting out measures to improve energy performance and reduce emissions of greenhouse gases for prospective buyers or tenants.

The owners then have the choice of:-

(1) carrying out the physical improvement in the Action Plan within three and a half years; or

(2) deferring the timetable for the physical improvements by recording and reporting operational energy ratings annually – this involves logging actual emissions and energy use in terms of a "Display Energy Certificate"; failure to comply could lead to a fine of up to £1000 from the enforcing authority who, in Scotland, are the relevant local authority.

How should sellers and buyers deal with the obligations?

The response in contract and due diligence is the emergence of broad warranties along the lines that Sellers are being asked to warrant that they have carried out all measures which may be required for the property to comply with energy efficiency legislation. It sounds benign but subtle use of the word 'may' could allow the buyer to claim they are future proofed against costs under the 2016 regulations and, that they can recover any costs through an indemnity at the tail end of the contract.

Key to avoiding delay in the deal and a warranty battle is the disclosure of information and actions on the 2016 regulations within the Seller's due diligence pack, plus drafting a balanced warranty in an offer to sell which takes account of the disclosure.

Get in touch

If you would like to speak to Harper Macleod in relation to dealing with Energy Performance Regulations, or any other matter, we would be delighted to help.