Carbon Reduction Commitment: Another victim of the austerity budget

The Spending Review 2010 found some innovative ways to increase the Government's revenue by using the CRC Efficiency Scheme.
One of the tools to be used was a statutory scheme whereby all participants would initially buy their annual Allowance through a bidding process. Initially the number of Allowances was to be unlimited but then it was to be capped thus encouraging participants to reduce the Allowance they require and save them money.
The second part, and what might be called the carrot, of the scheme was that the revenue generated by the auction of Allowances would be recycled to the participants so that, as you might expect, the best performers would receive the reward in the form of cash back.
In the Spending Review 2010 two major decisions were revealed:

1. The first sale of Allowances will be in 2012 rather than 2011.
2. Revenue from the sale of Allowances will be used to support public finances rather than recycled back to Participants.

The second decision is a significant change as it means that the league tables to be produced will now only have a reputational impact as opposed to a financial and reputational impact. Whilst many owners and occupiers will be concerned regarding their reputation and green credentials the cost-benefit of reducing emissions becomes much harder to justify on a reputation only basis unless one is significantly behind ones peers.

A knock on effect for Landlords is that whereas before there was some possibility of recouping some of the costs of compliance by moving up the league tables and receiving the reward of "revenue" from the sale of Allowances; now compliance is a fixed cost with no direct financial return. Depending on the terms of service charge provisions in leases it may not be possible to recover the cost of compliance from tenants. This will create an irrecoverable cost which must be deducted from the "bottom line" meaning values will suffer.

All landlords should instruct their lawyers to review the terms of their service charge drafting to ascertain whether or not the cost is recoverable. If it was before the change announced in the SR2010 then nothing will have changed. If it was not it may be now.

CRC is coming - time to take action

The Carbon Reduction Commitment is about to bite. It will place obligations on owners and occupiers of buildings to reduce the use of energy thereby reducing the carbon footprint. This will have cost implications and will also need to be addressed in the landlord and tenant relationship.
The BPF has just brought out a guide to the CRC for Landlords and Tenants. All landlords and tenants are urged to read this guide - it's contents may surprise you. Judgement is entity based not property based and once an entity is caught by the rules it will be responsible in respect of any property for which it has the supply contract with the energy provider. A Landlord would be wrong to think that it will be for its tenants, as the main user of the electricity supply, to comply - who is responsible depends on who is the counterparty with the electricity supplier for the property even if the landlord has installed sub-meters so he can recharge tenants based on use.
The guide provides useful tips on how to set-up oneself administratively to ensure compliance can be achieved. The work involved is likely to be time consuming and landlords and tenants should ensure that their leases allow for recovery of such costs through the service charge.
Further questions on recovery need to be considered in respect of the purchasing of "allowances".
The fact that CRC is based on group entities and not on buildings adds significant further complications. This has major ramifications in terms of the need to anticipate changes during a year and also how JV interests are dealt with. For tenants this can mean that as their landlord's identity changes the relevance of CRC and potential cost to it will also fluctuate.
Another issue for tenants who fall within the legislation is the difficulty of managing their energy use in properties where their leases restrict the work they can do. Time for rent review surveyors to sharpen their arguments on this front.
There seems little doubt that the implementation of CRC will greatly increase the burden (both administratively and financially) on owners and occupiers of property. The cost of saving the planet continues to rise - the cost of not saving it is, most would argue, far greater!