Research from Fidelity International found 97 per cent of commercial real estate in Europe cannot currently support a net-zero transition. If left as they are, these properties will become increasingly difficult to let or sell prompting talk of a ‘brown discount,’ where they could lose upwards of 30% of their value.

Retrofitting is one solution, but comes with significant barriers, notably the lack of financial capacity to carry out such works which can prove far more difficult and therefore expensive, due to the physical constraints of many older properties compared to newly-built ones. There are also transport and labour issues with retrofit projects, especially in more rural locations making the need for incentives (both in letting and construction contract arrangements) vital in enhancing the energy efficiency of many current buildings.

Government has a key role to play in achieving this aim to support net zero pledges. Both UK and Scottish governments need to consider funding to help make this journey viable in the same manner they have provided support to improve cladding standards.

Kirsten Partridge, partner and real estate specialist at law firm CMS

While public funding can act as a stimulus, landlords will also need to invest in this process to ensure they maintain their own ESG strategy and can continue to generate a stronger return on investment by avoiding or mitigating a brown discount on building stock in their portfolio.

There are key measures for landlords to consider in managing the challenges ahead. This starts with a review of existing post-2025 leases to assess contractual obligations for both themselves and tenants for repair, maintenance and improvement works. It’s important to take advantage of void periods in lettings to make such improvements, and ensure they can be carried out under the terms of any new leases with tenants.

Landlords are also encouraged to work closely with commercial tenants to improve ESG features of a building which enhances the latter’s credentials as a socially responsible employer. The conditions of a lease may also allow landlords to pass some of the liability to tenants under statutory compliance provisions.

In Scotland, we expect new regulations to bring further clarity to this issue - by driving energy efficiency by introducing a Minimum Energy Efficiency Standard (MEES) or an equivalent measure that requires works to buildings which have poor Energy Performance Certificate (EPC) ratings before they can be let or sold.

The English MEES regulations, which have the authority to impose financial and reputational penalties, have been very effective in helping the property industry focus on ensuring minimum acceptable EPC ratings are achieved. This regime also includes helpful provisions for tenants including a five-year consent exemption which gives some balance in recognising companies’ need to be able to keep operating. The Scottish Government will want to consider such measures within its own regulations.

Incentives will be key if Scotland follows a similar path to MEES whereby landlords must typically implement relevant energy efficiency improvements at their own expense to avoid penalties. Offering bonuses to those who meet or exceed energy efficiency targets could provide a useful means to help drive the retrofitting activity that will be required to bring our buildings up to scratch by 2050.

Kirsten Partridge, partner and real estate specialist at law firm CMS

Incentives are required to drive green retrofitting - Kirsten Partridge