At the Copenhagen climate change summit this week it has already been agreed that, as part of an EU package, the UK will contribute over £1.5 billion over the next three years to help developing countries cope with climate change. Some people would argue that such a figure is disproportionate, particularly during difficult economic times, when the UK's total output of CO2 is relatively small in global terms. Others would argue that our economy has benefited enormously throughout the years from industries that emit greenhouse gases.
As the summit draws to a close as this article goes to press, more countries are stepping forward with funding proposals and emissions reductions commitments, and it is clear that the green movement has changed considerably in recent times. Whether you are a believer in man-made global warming or a sceptic, climate change is now a serious issue on the political agenda and will remain so for years to come. And the idea of all of us having to make sacrifices to save the planet is more relevant now than ever before.
In addition there has been much discussion at Copenhagen as to whether, after the majority of countries failed to meet their Kyoto targets, there should be further binding targets set for the reduction in climate change. Scotland has already set itself such targets: the Climate Change (Scotland) Act 2009 introduced ambitious targets to reduce carbon emissions in Scotland by at least 80% by 2050, with an interim target of a reduction of 42% by 2020.
There are a number of proposals, some contained in that Act and others that have been introduced separately, that will be used to attempt to meet these targets, including provisions regarding the obtaining of planning permission for micro-wind turbines on domestic properties and giving the Scottish Ministers the power to oblige the sellers of goods to charge customers for the provision of plastic bags. However there are two proposals that have a potential to have a major effect from a property perspective.
New Building Standards
Firstly, the Scottish Government intends to introduce new building standards for both domestic and non-domestic buildings in October 2010. The aim is to reduce carbon emissions from new buildings by 30% compared with the current building standards. This involves a number of detailed additional standards for both domestic and non-domestic new build properties. For domestic properties, this includes the introduction of an air-tightness testing regime, and new provisions for ventilation and cooling systems. For non-domestic properties, new guidance on provisions for shell and fit-out buildings is proposed. Both commercial and residential developers will require to scrutinise the relevant provisions in detail to ensure that they are able to comply.
The regulations may well increase build costs, and developers will require to consider whether this increase will be material enough to have a knock-on effect on market values. As well as affecting the value of sites that developers are considering offering for, this could also affect sites over which developers currently have options. Depending on the wording contained in the Option Agreements, developers may be able to argue that the market value of a site (and therefore the purchase price) has been reduced by the new provisions.
Assessments of buildings
Secondly, the Climate Change (Scotland) Act 2009 states that the Scottish Ministers must produce regulations providing for the assessment of (i) the energy performance of non-domestic buildings and (ii) the emission of greenhouse gases produced by or otherwise associated with such buildings or with activities carried out in such buildings. The Scottish Ministers must then require owners of the building to take steps, identified by the assessment, to (i) improve the energy performance of the buildings and (ii) reduce the emissions. There are similar proposals for living accommodation.
The draft regulations have yet to be produced but it is likely that in the relatively near future, the energy performance and emissions of all non-domestic buildings will require to be assessed, irrespective of whether the building is being sold or let. It is not yet clear how these proposals will interact with the existing Energy Performance Certificate regime, however it is thought that the new regime may well take an approach similar to the requirement for adjustments to buildings under the Disability Discrimination legislation, where an assessment has to be carried out, and then steps identified by the assessment must be implemented.
Additional costs to owners
The Act states that the owner of the building will be "required" to take the steps to make the building more efficient however it does not state whether the owner will be responsible for the cost of these steps. The Scottish Government have promised that they will allow for a period of consultation after the draft regulations have been produced. The property industry is likely to want to lobby strongly against further financial pressure, and look to government to produce a package that not only incentivises energy efficient behaviour, but also helps with the costs of compliance. The Act already contains provisions providing for a discount on the non-domestic rates for a building where steps have been carried out to improve energy efficiency and reduce emissions so one option is that this could be extended. This discussion is, however, likely to take place against the backdrop of large cuts in public spending, which may make it more difficult to argue for significant incentives.
How will let buildings be treated?
Assuming the owner of the building will be required to share at least some of the cost of the improvements, landlords and tenants will require to consider these provisions carefully as the question of who will be liable for this new cost will arise. In the case of existing leases, the terms of the lease and the wording of the regulations when they have been finalised will require to be considered carefully. In many cases landlords may attempt to argue that the clause in the lease obliging the tenants to comply with statutes will be sufficient to make the tenants liable for the cost of the improvements. Where new leases are being negotiated, the parties may wish to consider the Green Lease Toolkit prepared by the Better Buildings Partnership's Green Lease Working Group. This is a voluntary code, which is currently being trialled by some of the Better Building Partnership's members in London, providing a number of draft clauses dealing with various green issues in leases, including energy efficiency audits.
Carbon Reduction Commitment
Two other issues should also be noted from a property perspective. Firstly, the Carbon Reduction Commitment Energy Efficiency Scheme, a UK wide emissions trading scheme, developed under the auspices of the Climate Change Act 2008, is due to come into effect in April 2010. Large organisations will participate in the scheme, which requires them to purchase allowances based on the amount of emissions from their buildings. Many of those organisations will be landlords of their buildings and the question of who should be liable for buildings emissions in the landlord/tenant relationship is complicated. For existing leases, it is likely to come down, in individual circumstances, to the wording in the lease and who has contracted for the electricity supply to the property, which will often mean that it is the landlord who is liable to buy the CRC allowances for the building, despite the fact that it is the tenants who are principally responsible for producing those emissions, over which the landlord may in reality have little control.
When negotiating new leases, landlords should carefully consider the CRC position, and will want to ensure as far as possible that the allowances they have to purchase are fully recoverable from the tenants. This is not as straightforward as it sounds, as the CRC scheme also involves repayment of all or a proportion of the allowances, depending on the performance of the participating organisations – that performance may not be directly attributable to the emissions from the building in question.
Climate change burdens
The Climate Change (Scotland) Act also makes it possible to create a new title condition, to be known as a climate change burden. This will be a real burden that can be imposed on the title of a property in favour of a public body, a trust or the Scottish Ministers for the purpose of reducing greenhouse gas emissions. The burden must consist of an obligation on the owner to ensure that in the event that the property is developed the buildings meet certain specified standards. It remains to be seen how often this type of burden will be considered appropriate in practice.
Property owners need to build in climate change provisions now
Buildings are becoming subject to a growing number of measures that attempt to tackle climate change, improve energy performance and reduce greenhouse gas emissions, and the impact of these measures on all businesses will continue to expand. Active steps need to be taken now to consider the effect that these climate change provisions will have on your business, and by making adequate provision for them when purchasing, leasing or taking an option over buildings, help to ensure that the cost implications are fully considered and allocated.