Carbon Reduction Commitment Energy Efficiency Scheme

[Derek_Parkinson]

The carbon footprint of buildings accounts for more than 50% of greenhouse gas emissions in the UK according to government estimates. So reducing the footprint of commercial buildings through the Carbon Reduction Commitment Energy Efficiency Scheme (CRCEES) will be essential to meeting UK targets, but the scheme introduces complex issues for both landlords and tenants.

In this article we will look at the sorts of difficulty that are likely to surface and the latest guidance and insights from experts. Some general points are worth keeping in mind when looking at the impact of CRCEES on the landlord-tenant relationship. First, the scheme is targeted at organisations rather than built infrastructure; second, such guidance as there is has been drafted to cover a wide range of sectors; and third, the requirements of CRCEES may not fit easily into existing agreements between landlords and tenants.

On the first point, a tenant in a particular building may in future find itself included in CRCEES simply because the organisation of which it is a part has expanded to the point where it fulfills the entry criteria, a scenario that can affect the landlord too. In both of these cases energy use in a particular building may become subject to CRCEES because of emissions produced elsewhere. In addition, owners of buildings and the tenants that occupy them inevitably change over time, adding further complexity.

Areas of uncertainty

“The average lease for a commercial building is five years, so there is a degree of tenant churn to take account of in the scheme. Plus, the landlord may be in and out of the scheme,” says Patrick Brown of the British Property Federation (BPF). “We see these as emerging concerns along with questions such as whether landlords can pass on the costs of participation to tenants, and whether normal clauses in contracts may or may not be able to accommodate the scheme.”

“The trouble is that the CRCEES does not fall easily within clauses relating to fiscal policies – taxes – or energy costs, or building regulations strictly speaking – it's a cap and trade scheme aimed at organisations after all. In the end what matters is what's in the lease, and if it does not explicitly mention the scheme does it address something like it? Some leases refer to emerging laws and fiscal instruments, and one could argue either way that this accommodates CRCEES – it's open to challenge,” Brown says.

The BPF is working with cross-sector working groups to agree consensus on the best way forward, and has drafted some useful guidance for both landlords and tenants. Landlords are advised to appoint an individual, ideally at board level, within the highest UK parent organisation to be responsible for CRCEES, and to appoint one individual – the CRCEES officer – within each of its individual buildings to manage all activities related to CRCEES, including energy improvements.

Basic checks for landlords and tenants

Within each individual building, landlords need to know whether tenants pay their own energy bills direct to the supplier, and if not establish:

 That tenants are aware of CRCEES
 Who controls energy supplied to the building, and how much is used for common areas
 What energy usage is included in service charges and how charges for real energy use are allocated
 What metering is in place, and whether reading routines can minimise estimated usage
 Procedures for alerting tenants to potential changes in charges
 Patterns of energy use and – if possible – a rough idea of the purposes for which it is used
 Whether leases allow recovering the cost of allowances directly from the tenants where the landlord is the supplier of energy to tenants, or through service charges for common areas

“There are some possible areas of disagreement over common areas and services,” observes Patrick Brown. “Some tenants might say that as they use the common services they should pay for the carbon. Others might say that the landlord gets all the benefits from cuts in emissions from common services, so the landlord should pay. There are loads of shades of grey here, and we'll just have to wait and see.” In some buildings it's possible that energy use for common services alone could be close to the threshold for CRCEES participation, says Brown. “I wouldn't be surprised if 5,000 MWh was accounted for just from common services in some of the bigger buildings in the City of London,” he says.

According to BPF, the first priority for tenants must be to find out whether they qualify for the scheme in their own right. If so, they need to understand the implications for each of their own premises, and should should take the following steps:

 Ask the landlord if it is likely to be a CRC participant, bearing in mind that even if it is not it can in future sell the property to a landlord who is a participant
 Check how they currently pay for energy in the premises that they occupy, specifically whether they pay utility companies directly, or their landlord invoices them on the basis of meter readings, or by apportionment of the total energy costs for the building

In addition, they should establish:

 How other tenants use energy if they pay a fixed proportion of the energy cost for the entire building. If other tenants are inefficient more allowances will need to be purchased and could mean a smaller recycling payment is received by the landlord.
 Whether the landlord proposes to charge a part of the cost of complying with CRCEES in service charges. If so, tenants should seek legal advice to establish whether the landlord has the right todo this

Need for a consistent approach

For both landlords and tenants it is essential to be clear about who is responsible for the energy supply for the purposes of CRCEES. Under government proposals if a landlord receives the energy supply – even if a facilities management company is the actual party to the energy supply contract – and provides energy to the tenants then it will be the landlord who is responsible for complying with the scheme.

What longer term consequences are there for the landlord-tenant relationship? One result could be an increase in the use of “green leases”, suggests Steve Crook, a commercial property specialist at Pannone LLP. Broadly, these set out specific responsibilities for the landlord and tenant with respect to the sustainable aspects of a property's operations, and may include energy efficiency measures, waste management and water efficiency.

“We have seen them in Australia and the US and are starting to see them here – for example in Manchester Science Park. But an issue with green leases is why would tenants pay for capital improvements? But the most important thing is the need for a consistent approach across sectors – not building by building, or landlord by landlord,” he says.

Key questions:

 Have we reviewed our landlord/tenant relationships?
 Do we have a strategy for engaging with our landlords/tenants/co-tenants?
 What are the benefits of joining an industry working group on this issue?