Bell & Scott's Property Update, March 2008

Welcome to the March 2008 issue of Bell & Scott’s Property Update.

In this month's issue we comment on a case where the landlord failed to recover from his tenant the cost of a drop in value caused by disrepair under a lease because the property was to be redeveloped.

We also provide a Briefing Note on Energy Performance Certificates which will soon be required for most buildings in Scotland.

In addition, we update you on (1) the Scottish Government’s Consultations on (a) Planning Appeals; (b) Planning and the Historic Environment; and (c) the Future of Flood Risk Management in Scotland; (2) new guidance on Capital Allowances; and (3) mandatory sustainable development ratings for new homes in England and Wales.

Recent Decisions

Poor prospects for repairs recovery where development is on the horizon

Ravengate Estates Limited (“Ravengate”) leased six flats forming part of a building in Streatham in London to Horizon Housing Group Limited (“Horizon”) on a lease for six years. Horizon’s lease contained an obligation to keep the premises in good and tenantable condition and repair. At the end of the lease, an inspection disclosed that the property was in serious disrepair and Ravengate sought to recover the costs of repair – estimated at around £317,000. A few months later, Ravengate sought planning consent to develop the flats. They wished to create fourteen flats instead of six. No repair works had been done meantime. Planning consent was granted some months later but, according to Ravengate, the costs for the development turned out to be so large as to make development uneconomic. A revised schedule of dilapidations was then prepared, slightly reducing the estimated cost of repairs to around £290,000. This action sought to recover that amount.

Ravengate claimed that it was entitled to recover the cost of repairs. It recognised that English law (in the form of the Landlord and Tenant Act 1927) limited the maximum which a landlord can claim in these situations to the diminution in value of the property caused by disrepair. Ravengate argued, however, that there was no evidence that the diminution in value was less than the repair cost since a prospective purchaser would view the property as worth more without redevelopment (because of the high costs involved) and would thus take account of the costs of repair in valuing the property. Horizon, on the other hand, argued that any prospective purchaser would see the possibility of development and the vast majority of repair works in the schedule would be unnecessary if development proceeded. Under English law, if that was to happen, the repair costs were not recoverable. Although some common parts works would still be needed, the effect on value was to diminish it by around £33,000 – so that was the limit of what Ravengate could claim.

The Court of Appeal agreed with the first judge in the case, finding that redevelopment was likely given the increased rental return then obtainable. Ravengate had not, in fact, carried out repairs, had clearly contemplated redevelopment and had started works towards redevelopment. Most of the claimed repairs would have been redundant as a result of redevelopment. Thus, Horizon’s liability was not the cost of repairs, but the costs of only those which would survive redevelopment.

Sheila Webster, Partner and Head of our Property Dispute Resolution Team comments:

Another case on the extent of repair obligations from the English courts – this remains a hot topic, and perhaps understandably so, given the large sums often at stake.

The English legal position is, of course, very different to that in Scotland. There is no Landlord and Tenant Act expressly limiting what a landlord can claim in Scotland. However, the Scottish courts will allow parties to bring any relevant evidence forward in arguing about the liability for repair claims. Although the usual method of calculating liability is the cost of repairs, the Scottish courts have been quite clear that they are open, in appropriate cases, to considering alternative methods. There have been one or two situations where the loss in value due to disrepair has been dwarfed by the cost of repairs, but none has yet been fully tested.

Perhaps Scottish landlords have been somewhat nervous of being the first case where the loss in value is found to be the limit of what the landlord can claim. I would, however, watch this space! Where there is evidence of such a situation, or equally where the tenant can gather some evidence of an intention to develop or demolish, it is entirely possible that a Scottish court would reach a similar conclusion.

Case referred to: Ravengate Estates Ltd v (1) Horizon Housing Group Ltd (2) Persons Unknown (2007)

A full text of the decision is available on the British and Irish Legal Information Institute website accessible here

Briefing

Energy Performance Certificates

The UK must have more energy efficient buildings as part of its strategy to meet its EU commitment to reduce carbon dioxide emissions. The UK Governments are, therefore, striving to establish “greener” buildings through legislation. Buildings, going forward, will have to carry an energy health certificate, an Energy Performance Certificate (EPC).

What is an EPC?    

An EPC is a certificate which scores the performance of a building by measuring its energy efficiency in terms of its carbon emissions and, additionally, shows recommendations on how the building can become more energy efficient.

The EPC in Scotland

The introduction of EPCs in Scotland is being coordinated by the Scottish Building Standards Agency (SBSA). SBSA is introducing EPCs under the statutory framework of the Building (Scotland) Act 2003, the Building (Scotland) Regulations and the Technical Handbooks issued under those Regulations. The detail of the requirements for EPCs can be accessed here.

When will EPCs be required?

It is already a requirement to obtain an EPC for all new buildings, both residential and commercial. That requirement became law on 1 May 2007. By 4 January 2009, the obligation to have an EPC will apply to virtually all domestic and non-domestic buildings, if, at any time in the future, they are sold or rented out. Public buildings over 1,000 sq. m will also need to display the EPC in a prominent position. Buildings which fall into the public category are those which are occupied or part occupied by public authorities or by institutions providing public services such as council offices, schools and libraries. In all other cases, the EPC must be affixed to the building in a position which is both protected and visible. It is thought that this will mean that they should be located beside the electricity and gas meters. For houses, the Property Information Pack (PIP), which sellers of houses will need to produce later this year, must contain an EPC.

What buildings do not require EPCs?

Only those buildings which use fuel or power to control the internal temperature come under a legal obligation to have an EPC. In addition, an EPC will not be required for:

• stand-alone buildings of less than 50 sq. m;
• conversions, alterations and extensions to those stand-alone buildings (unless they would increase the area of the building to 50 sq. m or over);
• places of worship; and
• short-life buildings (of less than two years)

It is worth noting that there is no exception applicable to listed buildings.

What does an EPC certify and how is this measured?

An EPC gives measurements of the carbon dioxide emissions from a building and an assessment of its energy efficiency. A rating will be given, similar to that which applies to domestic appliances such as washing machines, freezers and micro-waves.

Two forms of EPC have been approved for use in Scotland, one for houses and the other for all other building types - both forms present similar information but in different formats. The EPC for houses provides for both an energy efficiency rating and environmental impact rating. The non-domestic EPC expresses the building’s energy performance overall. Both will provide recommendations for cost-effective improvement of the energy performance of the house or building. This may involve suggestions such as the installation of additional insulation or the fitting of low energy lighting and other measures designed to help save energy, reduce bills and cut carbon dioxide emissions. Examples of the forms of EPC for use in Scotland can be accessed here.

There are two approaches to establishing the energy performance of a building: (1) the operational basis in which the actual amount of energy used by the building is established; and (2) the asset rating of a building which calculates the notional energy performance of a building. In Scotland, an asset rating has been chosen for all certificates. The asset rating is achieved by showing the ratio of the predicted CO2 emissions arising from the actual building when subject to a standardised set of activities to that of a notional building with the same size and shape and used in the same way, but with defined elemental standards for fabric and building services systems. Computer software is available for calculating the asset rating of a building on this basis - the Simplified Building Energy Model or SBEM details of which can be accessed here.

Who will provide EPCs?

The certification of buildings is to be carried out independently by qualified and accredited persons. The accreditation is awarded by SBSA. In Scotland, for existing buildings, these independent assessments can be undertaken by recognised professional and trade organisations. The SBSA will enter into protocol arrangements with these bodies. It has done so with the following:

(a) BRE;

(b) Royal Institution of Chartered Surveyors (RICS);

(c) The Chartered Institute of Building Services Engineers (CIBSE);

(d) The Association of Building Engineers (ABE);

(e) The Energy Institute (EI); and

(f) The Heating and Ventilation Contractors Association (HVCA)

EPCs will be produced as part of the building warrant and completion certificate process for all new buildings. Once an EPC has been obtained, it will remain effective for a period of 10 years before renewal is required.

Who is liable to produce the EPC?

EPCs are to be made available to prospective owners and tenants when buildings are constructed and the EPC must form a fixture within new buildings. For older buildings, it will be a requirement to affix an EPC to the building when it is sold or rented out. The obligation falls on the owner to produce the EPC. The production of an EPC is a necessary part of the construction of new buildings. For existing buildings, it will require an energy assessment to be carried out. For multi-let buildings with fire separating elements between units, the EPC to be obtained can either cover the entire building, or separate certificates can be obtained for each individual unit. It is anticipated that, for multi-let properties, building owners will be required to provide an EPC for each individually let part of the building – particularly if the individual part let contains mechanisms to regulate its own heat and air conditioning systems.

Consequences for non compliance

Failure to obtain an EPC will be regulated by the enforcement powers of local authorities contained in sections 25 and 27 of the Building (Scotland) Act 2003. Section 25 will be used for a failure to provide an EPC for an existing building and section 27 for a failure to provide in respect of newly constructed buildings. The local authority will be entitled to serve notice on the owner of the building requiring it to comply with the requirement to have an EPC and the owner must do so within 28 days. If the owner fails to comply with the local authority notice, it commits an offence which can carry a fine of up to £5,000. The local authority also has power to carry out the requirements under the notice and recover all its costs from the owner.

EPCs and the market

The need to show how energy efficient your building is may have a significant effect on the commercial property market. Now that buildings will, effectively, need a full energy assessment to be carried out, tenants may well try to achieve reduced rents for properties with poor EPCs, negotiating lower rents on the basis of higher fuel bills. Developers may also have to accept obligations in contracts requiring them to obtain a minimum asset rating for new buildings. In essence, a two-tier market could arise, with energy-efficient buildings attracting higher premiums and inefficient buildings losing some capital value. What’s more, investors might be unwilling to invest in poorly rated buildings because they anticipate a drop in the likely financial return and funders may even offer poorer lending terms against less energy-efficient buildings.

Time to prepare

Landlords, managing agents and tenants should start to collect the data required for EPCs, so that, when the time comes, they are not behind the times. The Carbon Trust has published a Building Design Advice Guide which contains a useful guide on what you need to know to move towards making your building more energy efficient and sustainable - the Guide can be accessed here. In addition, IPD, the Investment Property Databank, has just launched an environment code aimed at helping commercial property improve its sustainability performance. The IPD code strives to help occupiers, property owners and managers to measure efficiency in areas such as energy consumption, carbon emissions and waste processing.

News

Consultations

Planning Appeals

The Scottish Government has issued a consultation and draft regulations to amend the planning appeal system in Scotland. The Government aims to make the process for challenging planning decisions “more efficient without reducing the high quality of determination” provided under present arrangements. The consultation document can be accessed here. Responses are to be received by 9 May.

Planning and the Historic Environment

The Scottish Government has now issued a consultation on the national planning policy for the historic environment with a view to its protection, conservation and enhancement. The Government, through the consultation, wishes to consolidate, clarify and supersede existing planning policy guidance in NPPG 5 Archaeology and Planning and NPPG 18 Planning and the Historic Environment. The Consultation can be accessed here. Responses are to be received by 9 May.

The Future of Flood Risk Management in Scotland

The Scottish Government sets out its proposals which are designed to establish a framework within which sustainable flood risk management in Scotland will operate more effectively than at present. Local authorities, who are accountable to local communities and best able to judge the needs of their areas, will continue to be responsible for implementing flood prevention measures. However, the proposals seek to establish a way of co-ordinating catchment flood management planning to ensure a national approach, delivered locally. The consultation can be accessed here. Responses are to be received by 23 April.

HMRC Guidance on Capital Allowances

HMRC has published a technical note on the changes to capital allowances announced in the 2007 Budget. The note announces that enterprise zone allowances (EZAs) will be withdrawn from 1 April 2011. The changes will impact on those who may still be able to claim EZAs as well as those holding property in respect of which EZAs have already been claimed.

EZAs are currently available as a 100% first year allowance for qualifying expenditure on the construction of an industrial building either within ten years after the site was first included in an enterprise zone or within 20 years after the site was first included in an enterprise zone if it is incurred under a contract which was entered into within those ten years (“a Golden Contract”).

The reasons given for the changes are the continued use of EZAs by way of Golden Contracts and the fact that a scheme for exploiting allowances has been disclosed to HMRC under the disclosure of tax avoidance scheme rules. Those holding Golden Contracts have 3 years to complete their buildings and claim the allowances. The technical note can be accessed here.

Sustainable development ratings for new homes will be mandatory in England from May 2008

Sustainable development ratings for new homes will be mandatory in England from May 2008. The Department for Communities and Local Government (DCLG) has announced that new homes in England and Wales will be rated against standards contained in the Code for Sustainable Homes (the Code) from 1 May 2008.

In July 2007, the DCLG consulted on the future of the Code, including whether it should become mandatory for all new homes to be rated against the standards contained in the Code. The responses to the consultation showed extensive support for a mandatory rating system.

For private sector homes, meeting the standards in the Code remains voluntary. However, the Government will make regulations that mean, from May 2008, those selling new homes must provide information to any prospective purchaser on the sustainability of the home. Where a home has been designed and built in accordance with the Code and assessed against it, a Code certificate will be provided. The Code certificate will show the home's rating on a scale of 1 to 6 stars, based upon its performance against nine sustainability criteria. Otherwise, a statement of non assessment (a nil-rated certificate) will be provided.