Delivering net zero for Scotland's buildings - Heat in Buildings Bill: consultation

3. Property Purchases

3.1 We need many homeowners, landlords and businesses to make the change to clean heating systems in the coming years, and before 2045. This will ensure that we can meet our climate change targets, while also reducing the risk of too large a proportion waiting until close to 2045 and causing a huge spike in demand which would be impractical for manufacturers and installers to meet.

3.2 In order to achieve that, we have considered a range of circumstances where it might be appropriate, fair and practical to require building owners to meet the prohibition on polluting heating before 2045. During the past year, we have undertaken social research to help our understanding of public attitudes to the use of regulations^[20] and to the use of early triggers. This has helped shape our thinking, but our consultation asks for your opinion, and we are keen to hear views on what detailed approach we might take.

3.3 Sales in Scotland during 2022-23

There were over 100,000 house sales in Scotland during 2022-23, as well as over 5,000 sales or large commercial leases (over 20 years or capable of being over 20 years) registered in the non-domestic sector^[21].

3.4 As part of the existing process for purchasing a property, sellers must produce an EPC, which shows the main heating system(s) used in the home or non-domestic premises. This means that potential purchasers will be able to see whether or not the property they are interested in meets the new Heat in Buildings Standard, and may wish to take this into account in any offer that they go on to make.

3.5 Potential sellers may similarly consider investing to meet the Heat in Buildings Standard in order to make their property more attractive to buyers, and potentially achieving a higher sale price as a result.

3.6 The Scottish Government is therefore proposing to introduce a new law which will:

Require those purchasing a property to comply with the prohibition on polluting heating within a specified amount of time following completion of the sale.

3.7 This requirement will apply only after:

• the Bill that we are proposing to introduce has been considered and approved by the Scottish Parliament, and
• we have developed (and consulted upon) further regulations implementing the proposals. Chapter 8 provides more information on the next steps for the Bill and when it will take effect.

3.8 Under this proposed law, the purchaser of a property will be given time – known as a ‘grace period’ – to have the work carried out (including time to have their building assessed and/or to receive quotes from installers, as necessary).

3.9 We are considering, and seeking views on, the length of time for which this grace period should last for both home and non-domestic purchases, but think between two and five years is likely to be appropriate. This will balance the need to treat the new building owner fairly with the need to make progress in reducing emissions. We are considering whether to apply the requirements to all commercial long-term leases registered with Registers of Scotland alongside sales of non-domestic properties.

3.10 We continue to explore how this approach might work in practice and will use responses from this consultation to ensure a clear, simple and feasible system. By way of illustration, though, our current thinking is that the process would work as follows:

Example for Illustration purposes:

Following a Property Purchase (homes or non-domestic buildings):

• The seller lists the property for sale and, as they do at present, obtains a Home Report including an EPC.
• The EPC shows the heating system(s) used in the property, and whether it is using clean or polluting heating.
• This means that – before making an offer on the property – potential purchasers can see whether any potential work would be required to change the heating system.
• As they do at present, any conveyancer being used will provide advice to the purchaser about their obligations if the property purchase is completed (including whether the heating system will have to be changed).
• Where an offer is accepted, the prospective purchaser can consider how best to finance necessary improvements. This could include discussing lending options with a bank or building society to fund the works alongside their mortgage application, taking out a personal loan or accessing product finance, or paying for improvements.
• After the purchase is completed, it is registered with the Registers of Scotland (RoS).
• Beginning from the completion date, the purchaser would have a grace period to replace the polluting heating system.

3.11 This proposal places no new obligations on sellers, and so avoids any risk that people are stuck in their homes when they may need to move urgently (for example, for work or for safety reasons).

3.12 We will work with conveyancers, solicitors and estate agents to ensure that this proposal works smoothly alongside their current processes and to make sure that purchasers, and those providing them with legal services, are clear about their role and responsibilities.

3.13 We recognise that first time buyers and those who move more than once before 2045 are more likely to be affected by this proposal. We know too that certain types of properties may have limited options for clean heating systems in the near term. This includes, for example, flats, homes that aren’t suitable for certain energy efficiency upgrades, or properties in areas that don’t have sufficient electrical grid capacity. We also want to ensure that businesses remain in Scotland, and remain attracted to coming to Scotland, so that we can retain and grow our workforce.

3.14 So we are proposing that certain households and businesses will be eligible for additional time, asked to meet a modified version of the Standard, or exempted from the need to move away from polluting heating following a property purchase – helping to ensure a just transition in line with our legal obligations. Chapter 5 provides more information on these exemptions.

3.15 We are not proposing that those purchasing a property should meet the minimum energy efficiency standard any earlier than 2033. Anyone purchasing a property after these dates should be able to expect that the property in question is already compliant with the minimum energy efficiency standard set out in chapter 2, and, if they are not, to reflect this in the asking price.

3.16 What this means is that we will not be introducing a ‘ban’ on properties being sold. However, properties in the private rented sector which don’t meet the energy efficiency standard by the end of 2028 would not be allowed to be leased to a new tenant (should the existing tenant leave).

Managing the costs of complying

3.17 Whether homeowners are installing insulation to meet the minimum energy efficiency requirement in a property that they have lived in for years, or replacing a gas boiler with a climate- friendly heat pump in a home that they have just purchased, we know that owners will be facing additional costs and will need to think about how to meet those.

3.18 We recognise that there will be impacts on the housing market as well. Over time, homes that are sold with clean heating already installed will expect to see that reflected in price in much the same way as variations in condition already affect the relative price of two otherwise comparable properties.

3.19 Those buying a new home will need to think about how they are going to fund the work that may be required – in the same way that we would think about funding other work that we might want to do in a new home or business premises. The choices we make here will depend on our own personal circumstances.

3.20 When buying a property, most of us use mortgages. If it is affordable for the purchaser, lenders can also offer increased borrowing for improvements to the property. Many lenders are now offering lower rates of interest for additional borrowing to fund energy efficiency improvements or for installing clean heating systems – this is often termed a “green mortgage”. This means that buyers would be able to spread the costs of the installation over many years rather than having to pay for the work upfront.

Example for Illustration purposes:

The Johnstons are planning to buy a new home. Their dream property already meets EPC Band C but they want to replace the property’s old existing gas boiler with a heat pump. They contacted a number of suppliers who advised that they would not require wider work like new radiators or plumbing upgrades and that the property is “heat pump” ready, all offering competitive quotes for the work in the region of £8,500.

They are planning to get a mortgage to help them buy their property. Their mortgage provider advised that they will be add the entire amount of £8,500 to their mortgage at zero per cent interest for up to five years, after which time the remaining balance of the loan would revert to the standard variable rate mortgage. They decided to proceed with the offer and took the loan over ten years, the additional amount borrowed mean they paid an additional £71 a month over the first five years, followed by £86 over the next five years.

3.21 Not everyone has a mortgage, however, and not everyone will be able to, or want to, borrow from a mainstream bank to fund the additional costs. We are already seeing companies develop product finance offers to help individuals spread the upfront cost of clean heating systems over time, with such products being widely used to pay for gas boilers at present.

Example for Illustration purposes:

Helen had recently bought a new home and wanted to replace the gas boiler with a heat pump. The supplier she had identified was offering a 0% finance offer on air source heat pumps. Helen decided to proceed with the no obligation in house survey – and the company worked with her to identify the size of heat pump that she would need and the additional work she would need to get done, including some additional insultation to improve the energy efficiency of her home. The total cost of the work was £14,000. Helen’s circumstances meant she was eligible for a grant of £7,000 to support her. The supplier then offered Helen a 0% finance option for the remaining £7,000 if the loan was repaid in 2 years, or longer term finance at an APR of 3.9%. Helen decided the best option for her was to go with a repayment term of 7 years which means she pays £95 per month, as it suited her budget.

3.22 The Scottish Government also currently provides zero interest loans through our Home Energy Scotland and Business Energy Scotland schemes to help people and small / medium enterprises finance energy efficiency work and install clean heating systems. We want to ensure that similar products remain available in future (subject to future budget decisions, made following the usual process), and that can help as many people as possible. We are working with banks and other finance bodies, like credit unions, to help them to develop a wide range of options to suit different circumstances.

Example for Illustration purposes:

The Hendersons recently bought a semi-detached house. They wanted to replace the gas boiler with a heat pump and put in place new triple glazing. The total cost of the work was estimated at around £20,000. They were able to fund £7,500 themselves from their sale of their previous home, and so, to fund the remaining costs, they applied for an interest free loan of the maximum amount of £7,500 to be paid back over 10 years and were able to get a green home loan from their mortgage provider of £5,000 over the life of their mortgage. They will pay an extra £97 per month for the next 10 years which will then reduce to an extra £32 per month over the life of their mortgage.

Example for Illustration purposes:

Adam and Kaye run a small joinery company and their business is growing. They are seeking to buy new premises to enable them to expand and have their showroom and workshop on the same site. The unit they have identified needs some work done to it, including upgrading its heating and lighting system and currently has high energy running costs. Business Energy Scotland helped them identify the work required, how much it would cost and what it would save them. The work needed was estimated at £150,000 but would save over £16,000 on energy bills. As a Small or Medium sized Enterprise (SME), they were able to access an interest free loan of £100,000 repayable over 10 years to help fund the work and by using their existing relationship with their bank, were able to quickly and easily identify a way to borrow the remaining £50,000 on terms that worked for them.

3.23 We know that there will be some people who will not be in a financial position to improve the energy efficiency of their home, or who buy a new property but will not be able to afford to pay for, and carry out, the work needed to install a clean heating system. This means that there may be some circumstances where people need (and can be given) extra time or additional support to comply with either the energy efficiency or heat requirements of the Standard, or exempted from taking action when purchasing a home. We would be grateful for views on what these circumstances should be.

3.24 But we will also ensure that there is still public funding to support people and businesses who need it most taking into account the range of exemptions and abeyances that will apply – for example, if you meet certain criteria, our current Warmer Homes Scotland scheme means that you can have energy efficiency measures and a heat pump installed with all the work planned and carried out for you, fully funded by the Scottish Government.

Example for Illustration purposes:

Mrs L lives in the Highlands in a property that is not connected to the gas grid. She contacted Home Energy Scotland because she felt her previous electric heating system was old and needing replacing. She was found to be eligible for Warmer Homes Scotland scheme. She had a survey done and the surveyor recommended a heat pump along with installing underfloor insulation. The work was carried out quickly with most of the work being done in one day. Mrs L finds the heat pump much more efficient and cost effective that her previous heating and it retains the heat really well because of the extra underfloor insultation. This has given her incredible peace of mind about her heating bills which are now much lower than they were before.

A “cost-cap”

3.25 Our proposals to require homes to meet a minimum standard of energy efficiency by 2033 (or by 2028 in the private rented sector) and transition to a clean heating system following the purchase of a property may need us to create a ceiling or cap on the potential cost of meeting the Heat in Buildings Standard.

3.26 This may be needed in order to ensure that homeowners are not required to pay unreasonable costs when improving the energy efficiency of their homes, and so that banks and building societies know the maximum costs that their customers will face when determining whether mortgage and any loan repayments are affordable. We think that this would reduce the risk of lenders being unwilling to offer mortgages on homes that don’t meet the Standard, and thus potentially slowing the property market.

3.27 While a cost-cap may be important, it may also be challenging to make sure that it is fair and effective, and that it doesn’t create unintended consequences.

3.28 There are a range of ways that a cost-cap could be set:

Potential options:

• A ‘flat’ cap of £X that applies to all homes and of £Y that applies to all non-domestic buildings.

  While this would make clear the maximum cost any owner will face, it is likely to be unsuitable as the size, construction, use etc. of buildings varies greatly and will lead to varying costs. This could lead to fairness issues, as it is likely that those in older or larger buildings will exceed a flat cost-cap more frequently than those with new or smaller buildings.

• A ‘size-based’ cap, that applies to all buildings based on their internal area (£X / m2).

  This would look to treat homes and businesses equally by setting the total costs as a direct reflection of the size of the building owned. The size of a building is also recorded on an EPC, meaning that the size-based cap applying to each building could be calculated.

  However, the size of a home or non-domestic building is not always a good indicator of the costs of changing heating system or making energy efficiency improvements – for example, an older home with solid walls at 74m2 is likely to cost more to meet the Standard than a new build home of the same size. It may also be unfair or complex in the non- domestic sector, as there are many examples of where large areas of the building are unheated.

• A ‘purchase price-based’ cap, that applies to all buildings based on the price paid for the property (X% of the purchase price).

  This would ensure that the investment needed to meet the Heat in Buildings Standard was a direct reflection of the value of the homes or commercial premises. The purchase price of a building is recorded with the RoS, allowing us to ascertain the cap that would apply to each building.

  However, the cap would not apply fairly across the country in this system, with those in areas that see higher property prices paying more to meet the Standard than those in similar buildings in other parts of Scotland. It may also drive those with homes of lesser value towards heating systems that are cheaper to install, but which are generally much more expensive to run.

  Furthermore, it would not be suitable for capping the cost of energy efficiency improvements which must be undertaken by a backstop date and not triggered by the purchase of a new property.

3.29 These issues and others – like the length of time the cap should apply, whether it applies to heating systems only or to energy efficiency improvements, and whether it only applies after a property purchase – will take more time to resolve.

3.30 We would be grateful for your views on whether a cost-cap is needed, your thoughts on the methods of calculating a cost-cap (described above), as well as any other views or ideas about a cost-cap that you may have.

Meeting the Heat in Buildings Standard at other points in time

3.31 There are other circumstances where it may, in time, be possible or make sense to require people to end their use of polluting heating – for example, when their current gas or oil boiler comes towards the end of its life.

3.32 The UK Government has said that it plans to introduce a law like ours, i.e. which will ban new fossil fuel boilers being installed in homes and non-domestic buildings after 2035.

3.33 There is some attraction to using natural turnover in heating systems as a point of change. However, right now there are some practical issues of compliance and dealing with crisis breakdowns of boilers which make it not appropriate in the near future within regulation. However, as the market and supply chain for clean heating develops over time and as we see costs reduce in the way that we expect, then it may become affordable, fair and feasible to require people to end their use of polluting heating at other times, not only following a property purchase.

3.34 We are therefore proposing that the Heat in Buildings Bill will:

Provide Scottish Ministers with the ability to require homes and non-domestic buildings to end their use of polluting heating in other circumstances (beyond the purchase of a property).

3.35 This use of these powers would be a matter for future Scottish Governments to decide upon, and would also be subject to further consultation as well as the consent of the Scottish Parliament^[22].

3.36 But including such a power will help to future-proof our proposed Heat in Buildings Bill, and avoid the need for additional primary legislation in future when further progress in emissions reductions may be needed.

Questions on Chapter 3 - Property Purchases

Q9. To what extent do you support the requirement to end the use of polluting heating following a property purchase?

Strongly support

Somewhat support

Neither support nor oppose

Somewhat oppose

Strongly oppose

Don’t know

Please include any additional comments below.

Q10. We are proposing to give those purchasing a property a ‘grace period’ to end their use of polluting heating. Do you agree with this proposal?

a. Yes – the grace period should be two years.

b. Yes – the grace period should be three years.

c. Yes – the grace period should be four years.

d. Yes – the grace period should be five years.

e. No, please provide reasons for your view.

Q11. To what extent do you support our proposal to apply a cost- cap where people are required to end their use of polluting heating following a property purchase?

Strongly support

Somewhat support

Neither support nor oppose

Somewhat oppose

Strongly oppose

Don’t know

Please include any additional comments below.

Q12. Which of the following methods of applying a cost-cap do you support?

a. A flat cost-cap.

b. A size-based cost-cap.

c. A purchase price-based cost-cap.

d. None.

e. Another, please suggest below.

Q13. To what extent do you support the proposal that the Scottish Ministers should be given powers to extend the circumstances in future (beyond a property purchase) in which people could be required to end their use of polluting heating?

This could be, for example, preventing the installation of new fossil fuel boilers when replacing the heating in your home or business premises?

Strongly support

Somewhat support

Neither support nor oppose

Somewhat oppose

Strongly oppose

Don’t know

Please include any additional comments below.