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.

FRI Leases in a recession - not always the protection you expect

The Financial Times reported today that "Maintenance Cuts threaten property values". For those who cannot be bothered the article what it says it that whilst UK property is generally let on full repairing and insuring tenant covenants landlords are cutting back on repair and maintaining those parts of the properties for which they have responsibility and for which they recover the cost through the service charge due to fears over whether the costs are recoverable arising from tenant default and increasing voids. Meanwhile, landlords are facing an increasing number of void units in disrepair due to tenants failing to repair and then becoming insolvent.

The failure by landlords to carry out anything but the most urgent of repairs is, of course, a double edged sword for a landlord. It exposes the landlord to the risk of tenants seeking to enforce landlords' repairing obligations (although this might be unlikely save where the disrepair is likely to damage the tenant's business). More importantly, it makes reletting the unit at the best rent very difficult since the centre in which the unit is quickly becomes dilapidated and less attractive to potential tenants. Hence, one could argue that failing to repair is only prolonging the pain for the landlord. In truth, however, landlords will probably wait until real signs that the market is picking up before deciding to carry out repairs. The timing does need to be right since if a competing location is in better repair and condition it may prove more attractive and take away potential new tenants.

Repair of individual units is even more tricky for landlords. Is there any point in carrying works of repair to a vacant unit with little chance of letting. On the other hand what chance is there of letting a unit in disrepair and what effect will this have on rent. Some landlords may opt to wait until a potential tenant is found and then agree to put the property in repair (or pay a reverse premium to the tenant to do this). This means that the level of rent should not be affected. However, a tenant looking to move in quickly (especially in the run-up to Christmas to make the most of the holiday trade) is more likely to opt for a unit ready to go.

Finally, all landlords (and tenants when landlords are carrying out works) would be well advised to check carefully the terms of service charge provisions in the various leases to check what works are recoverable and what are not. How are voids treated? What are the obligations in terms of repair?

Commercial Lease Code - let's be radical

The news that the 2007 Commercial Lease Code has not proved any more well known than its predecessors has been met with dismay by the Government. Larger, institutional landlords did embrace to some degree the Code and did their best to publicise it. However the fact remains that much of the country's commercial estate is owned by small landlords and managed by small agents who have no interest in publicising the code as all it would do is damage their negotiating position and, in the case of agents, raison d'etre. So the prospect of legislation looms closer.
What I am about to say may shock you but . . . bring on the legislation. But not in half measures. Let's not tinker around the edges. Let's be radical.
I propose that for all leases of an area less than a certain minimum and/or a rent below a certain level (eg. £50k per annum) there should be a statutory prescribed form of lease. It could have the following:

• a minimum 2 year and maximum 10 year term
• Index-linked upwards only rent
• Security of tenure
• Repair to standard at date of first lease
• Assignment with consent not to be unreasonably withheld ("ntbuw")
• Underletting of whole with consent ntbuw
• Specific user with change permitted within same use class ntbuw subject to estate management considerations
• No alterations apart from internal non-structural with consent ntbuw
• Service charge drafting would be fixed by reference to the RICS Code

These are just suggestions but you get the idea. It may be that a few variations of the leases would be needed for different types of property and rental structures but all of this is achievable.
Why do this? Well the amount of time and money that is spent in the negotiation of heads of terms and subsequent documentation of those heads is one good reason. All landlords and tenants would need to agree would be the rent and term.
But the benefits go further. When an investor is reviewing a portfolio of properties low value leases would not need to be reviewed for consistency as the terms would be dictated by law. Certificates of Title could be reduced in size. Lawyer review time would be cut leaving more time to do the deal. Disputes would be dealt with more easily since the wording could quickly be interpreted by the courts and the number of disputes would fall. Everyone would benefit to some degree at some point.
The downside? Mainly in reduced flexibility although quite how much flexibility would be lost is questionable. Agents might need to reduce fees to reflect the lack of terms to negotiate but they would still be needed to find the tenants and get them signed up. Lawyers would lose out on fees as our services would not be required for straightforward leases but we would still be needed to negotiate agreements for lease, licences for alterations, etc.
So I say let's legislate, let's be radical, let's create the standard lease.

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!