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Avoid a flood of uncertainty: draft to include costs that aren’t maintenance, repair or replacement in a commercial lease
9 July 2014
The Government’s Carbon Reduction Commitment scheme will spark a host of contract disputes as landlords and tenants fight to move the onus onto each other. By Joe Payne
The UK Government’s Carbon Reduction Commitment (CRC) scheme is designed to encourage participating organisations to lower their carbon footprints. Because many participating organisations will seek to do so by reducing energy consumption at their property holdings, the launch of
the CRC in April 2010 is sure to see an increase in landlord and tenant disputes, and transactional lawyers should start drafting innovative new lease terms and provisions now.
What is the CRC?
The CRC is a mandatory, auction-based ‘cap and trade’ scheme that will affect the private and public sectors equally. Although the relevant regulations are still being finalised, eligibility for participation will depend on the amount of energy consumed in 2008. It has been estimated that up to 5,000 organisations will have to participate fully, with up to 20,000 having to disclose information.
Full participants will have to buy carbon allowances at the start of the year, measure and report their Co2 emissions and then surrender at the year-end a corresponding amount of allowances.
Allowances can be stored indefinitely and traded, so organisations that have insufficient allowances to surrender at the year-end will have to purchase additional allowances on the open market.
Organisations will be ranked each year according to their success at reducing emissions and it is hoped that this will ‘name and shame’ participants into cutting emissions.
The CRC will be revenue-neutral for the Government; revenue generated by the allowance auction will be recycled to participants at the year-end. Those towards the top of the league will receive their auction costs back plus a percentage bonus, while those towards the bottom will receive their auction costs back minus a corresponding penalty. Significant fines will be imposed in the event of non-compliance with the CRC.
Landlords and tenants: the impact
One particular aspect of the CRC will impact on landlord and tenant relationships.
Responsibility for energy use will be determined not by who ultimately consumes the energy, but by who the ’counterparty’ to the relevant energy supply contract is. Indeed, the Government has abandoned its original plan to allow participating landlords and tenants to transfer responsibility for the CRC among themselves. Instead, for simplicity’s sake (and perhaps to encourage landlords to treat the CRC seriously), all that will matter will be the identity of the counterparty to the energy contract.
This could be hugely significant for landlords. Landlords often pay for energy on behalf of their tenants and then recharge them, especially when the property is multi-let. In this situation the tenants’ energy emissions will count towards a landlord’s total, and the landlord will therefore have to purchase additional allowances accordingly.
The CRC is likely to cause disputes between landlords and tenants because participating landlords will want to limit their exposure to these new additional costs.
However, this will be difficult to achieve because very few current leases will contemplate the CRC’s practical consequences. Landlords may want to compel their tenants to limit their energy use, be it through efficiency savings or otherwise, yet few current leases will normally allow this - for example, would a retail landlord be entitled to stop its tenant from keeping its shop window lit up overnight? Similarly, disputes may arise if a landlord wishes to install, say, a wind turbine - would the lease allow them to recover the installation costs?
Landlords may seek to recover their CRC expenses under the lease, be it through the service charge or otherwise. Again, it is uncertain whether this will be possible. Not only will there be legal issues over whether the wording of a lease actually allows such claims, but even if it does there may also be practical problems, especially for multi-let properties - for example, if the landlord’s CRC costs are simply split equally among its tenants, a tenant that has reduced its emissions will suffer, as it will be paying for CRC costs caused by other tenants.
Also, tenants liable for their landlord’s CRC costs will no doubt want to receive an appropriate share of any recycled payments.
The Government has so far declined to legislate on these issues and has instead committed itself to promoting best practice guidance and voluntary schemes.
Whether this will limit disputes remains to be seen. What is clear is that new leases should be drafted to deal expressly and clearly with responsibility for CRC costs and many property organisations are now issuing guidance on this issue.
Until such terms become common practice, the negotiating of these additional provisions may prolong the drafting process. However, that time will be well spent if it reduces uncertainties and costly disputes arising in the future.
Joe Payne is a property litigation partner and a member of the green group at Field Fisher Waterhouse