Introduction
The Carbon Reduction Commitment scheme (CRC), designed to help the Government meet its target of reducing greenhouse gas emissions by 80% by 2050, can at first appear to impose heavy burdens on landlords and tenants. However, most benefits of energy policies are realised in the long term and it is the long term aims that will drive the changes that have to be made between the landlord and tenant relationship today.
Overview of scheme
The CRC is a mandatory ‘cap and trade’ scheme requiring organisations that use more than 6000 MWh of electricity on half hourly meters to purchase carbon ‘allowances’, proportionate to the level of carbon the organisation emits, at a fixed price from the government (in the second and third years of the scheme) and subsequently from auctions where the allowances combined will be capped. A secondary market will operate to allow organisations to purchase surplus allowances if required.
The scheme, which will affect all large organisations in the public and private sector, will be introduced in three phases over a five year period commencing in April 2010. The first year will primarily involve monitoring the use of energy within the organisation and reporting to the Environment Agency.
Implications for landlords and tenants
The test regarding whether the burden of the CRC ultimately falls on the landlord or the tenant is determined by which party is the counterparty to the energy supply contract.
Where the tenant occupies the entire building then it is normally the tenant who will be the counterparty to the energy supply contract and, therefore, responsible as a CRC participant.
Where the property is multi-let the landlord will have responsibility for either the energy in the whole building or the energy in the common parts. In the former situation the landlord will be the CRC participant and in the latter situation, where each tenant is responsible for energy use in his demised area, the landlord and tenant will both be CRC participants for their respective ‘parts’.
Potential problems
• Costs: Measures organisations will have to take to ensure more efficient use of electricity (for instance, purchasing energy saving appliances) and the general administration involved in monitoring and reporting energy consumption along with purchasing the carbon allowances will prove costly.
• Allocation of costs: A Lease will have to specify which costs fall on which party. Obvious problems arise for Leases predating the CRC coming into force, for instance, will the CRC costs fall under costs recoverable through a general ‘sweep up’ clause in a service charge?
Clear drafting is essential for multi-let properties where the Lease should provide for a situation where the tenant with reduced emissions does not have to pay the same costs as a tenant with higher emissions in the same building.
‘Green’ clauses can be inserted in the Lease to ensure the tenant’s everyday business is carried out in an environmentally friendly manner.
• Penalties: An Enforcement Notice will be served and subsequent failure to comply will be a criminal offence.
Potential benefits
• Cost saving: the CRC operates a ‘revenue neutral’ scheme whereby the revenue obtained from the allowances is recycled back to the participants along with a bonus or penalty dependant on their ranking in the performance league table. Therefore, energy efficient performance will be rewarded.
• A long term reduction in costs in terms of lower electricity bills and more efficient use of energy (however, this advantage is slightly diluted by the costs of administering and complying with the CRC scheme itself).
• Reputation: compliance with energy efficient policies will undoubtedly raise the organisation’s social responsibility profile, this could become a useful marketing tool particularly for organisations that tender for public sector work.
Practice points and immediate next steps
• Are you a CRC participant? It is important to familiarise yourself with the scheme and ascertain whether you fall within the scheme. For instance, in many cases the parent company will be the body responsible for complying with the scheme on behalf of the group as a whole.
• Monitor and plan: Compliance with the CRC may appear burdensome, however, it is mandatory and therefore organisations may as well use the policy to its best possible advantage.
• Although the CRC comes into force in April 2010 it is best to start gathering information on your current electricity use and commence planning how to reduce energy consumption in order to ensure compliance (and possibly obtain a bonus).
• Legal advice: Advice is essential for landlords and tenants regarding current and future Lease terms to ensure that the intentions of the parties regarding allocation of costs are correctly and clearly drafted in the lease.
For further information or for Commercial Property enquiries please contact Michael Fahy, Head of Commercial Property law at mfahy@steeleslaw.co.uk or telephone 020 7421 1720.