Changes to the Carbon Reduction Commitment Energy Efficiency Scheme were announced in the recent spending review. Recycling payments have been abolished and allowances are now to be offered for sale at the end of the Scheme year instead of the start. This appears to turn the Scheme into a green tax although the Government is carrying out a limited public consultation with participants on its initial changes which closes on 17 December. The Government appears unlikely to change the requirement that landlords account for their tenants’ energy usage under the Scheme because, in the Government’s own words, “landlords, rather than tenants, generally have the greatest ability to influence a building’s energy consumption”.

The changes should make it easier for landlords to pass the costs of the Scheme on to their tenants as they can now argue that the Scheme is a tax on the tenant’s energy consumption. As a consequence, tenants who will not be caught by the Scheme based on their own energy consumption are more likely to find themselves paying costs under it because their landlords are caught by it.

Removing the complicated system of recycling payments diminishes the argument against passing on the costs of the Scheme to tenants (that it is too complex to operate fairly). If landlords have the raw data (sub-meters are a must) then they should now have a much simpler method of passing down the costs to their tenants.

Landlords need to consider how best to do this as it could be done via the service charge, a stand-alone payment, as part of the recharging of utility costs or a combination of all three. Existing leases may still not enable landlords to recover the costs of the Scheme from their tenants because it is a tax on organisations and is not a property-specific tax or outgoing.

The costs which a landlord will incur as a result of the Scheme fall into two categories. The first are the management and administrative costs in complying with the Scheme, obtaining the energy use data and recovering costs from tenants. The second are costs relating to the direct use of energy and buying/surrendering allowances under the Scheme.

A simple and fair approach to recovery of Scheme costs from tenants must be adopted. Landlords should consider establishing a way of recording the energy use in their portfolios from the ground up ie, the per-tenant use for each building in a portfolio. This should enable the landlord to fairly:  

  • recover management and administrative costs across its portfolio;
  • attribute the costs of allowances to an individual tenant’s energy use; and
  • attribute the costs of allowances for common areas within properties following the same method of apportionment as the actual utility costs eg, via a service charge.

Having established the basis of apportioning costs, landlords must then decide how and when to recharge the costs to the tenant. Some costs may be best recovered direct from a tenant and others via an existing service charge regime. It will also be important to have a coherent method of dealing with changes in tenant and an understanding of how to deal with the sale or purchase of an investment property.

Clearly, tenants need to be aware of the potential additional costs when taking a lease. Whilst the costs of the Scheme are directly related to energy use, whether you pay them depends on the status of your landlord. This may change during the term of the lease and tenants should be aware of this when agreeing new leases or taking assignments of existing leases.

For a briefing on the Scheme itself click here.