Further guidance which considers how the new compulsory trading emissions scheme, known as the Carbon Reduction Commitment Energy Efficiency Scheme ("CRC") will affect landlords and tenants has now been published by the Property Industry Working Party.

The Guide considers whether CRC will apply to an organisation in the introductory phase of the scheme and summarises who might be affected specifically in relation to leased premises.  It points out that whilst some organisations will not be required to comply with the scheme (because their energy output does not reach the required level) they may still be affected if they lease premises from a landlord who falls within the scheme and those premises form part of a multi-let shopping centre or office building.  The landlord may be required to participate in the scheme and will be responsible for the energy supply to the common parts.  It may look to pass on the costs of the scheme (both allowances and/or administration costs) to its tenants.  Both landlord and tenant organisations should therefore be aware of the relevant issues now even if they are not likely to be participating in the scheme in its introductory phase.

The respective landlord and tenant responsibilities under CRC will depend on the type of letting and can be summarised as follows:-

  • Where a whole building is let to a tenant – the tenant is likely to be responsible for the energy supply to the building and, as a result, will probably have responsibility for compliance with CRC (assuming it meets the qualification criteria).  However, if the landlord supplies the energy and recovers the cost from the tenant, the landlord will be responsible for compliance.
  • Where the premises form part of a multi-let building or a shopping centre – the landlord will almost certainly provide the energy for the common parts and so will be responsible for the same.  Responsibility for individual premises will depend on who supplies the energy for those individual premises:-
  • Where the tenants have their own energy supply, the tenant will have responsibility for compliance with CRC in relation to the premises (assuming it meets the qualification criteria);
  • Where the landlord supplies energy for all tenant premises, the landlord will have responsibility for compliance with CRC.

Landlords and tenants also need to bear in mind the following:-

  • Will the landlord seek to pass on the costs for the common parts by inclusion into the service charge expenditure?  The CRC Order does not contain any provisions to allow landlords to pass on the cost of either purchasing allowances or compliance to their tenants.  The British Property Federation is consulting on this point but consensus has not yet been reached.  Landlords will therefore need to consider whether such costs can be passed on and tenants will need to be aware that landlords may seek to include the costs in the service charge;
  • Will such charges be estimated or calculated afterwards?  Estimating the cost of allowances is likely to be problematic and, as energy consumption is expected to decrease, tenants will not wish to be charged with previous year's costs after the allowances and revenue recycling payments have been properly calculated;
  • Whilst the current landlord may not be a CRC participant, it could sell its interest to another party who does participate in the scheme.  Such landlords may have established schemes and mechanisms for recovering the costs of the same already in place and may seek to introduce the same following acquisition of new interests.

It is therefore essential that any landlord or tenant organisation is aware of the potential issues and understands the implications of CRC, in relation to landlords and tenants, sooner rather than later.

CRC – The Government Scraps its Redistribution Plans

It emerged from the Government's spending review on 20th October 2010 that plans to reward the greenest organisations under the CRC have been scrapped.  Instead of the proceeds being redistributed to the best performing organisations, the Government will use the proceeds of the CRC to support public finances.

The CRC was set up to provide organisations with an incentive to improve their environmental performance.  A league table is to be set up showing which organisations perform the best in terms of carbon reduction.  Those performing the best were to receive rebates if they reduced emissions, with poorer performers paying penalties.  As revealed by the spending review last week, the Government now plans to retain the proceeds from the CRC to put towards the budget deficit.  This means that organisations participating in the scheme (including businesses, retailers, hospitals and local authorities) will have to reassess their own budgets and find additional funds to pay the increased costs which, unfortunately, could well be substantial.

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