The Environmental Upgrade Agreements (EUA) are an innovative and new way for the Victorian and New South Wales (NSW) governments to try to stimulate energy efficient upgrades of commercial buildings. They are finding popularity as owners and tenants see the merits in sharing the costs of upgrades to improve energy, water and environmental efficiency and sustainability (“upgrades”).

What is an EUA?

An EUA is as an agreement between a building owner, local council and financier. The finance is provided to the owner to carry out pre-approved upgrades. The council then places a charge against the land, collecting and forwarding its proceeds through the rating system to the financier. It is the security provided by the charge that has stimulated private sector investment as the liability to repay the loan attaches to subsequent owners and tenants of the charged land.

When is it used?

An EUA can be entered for existing commercial buildings and buildings that are “predominantly used for non-residential purposes”. In NSW, multi-residence strata scheme buildings comprising more than 20 lots are also eligible. Councils cannot make entering into an EUA a condition of their consent for redevelopment works.

Who bears the cost?

EUAs are an attempt to provide a stronger incentive to owners to carry out upgrades. They reduce the “split incentive” that used to benefit tenants, who would reap the rewards of the owner’s investments. Under an EUA, the owner can pass on the cost of the upgrades to tenants as outgoings. The upgrades are expected to pay for themselves through savings on power bills.

So what’s the catch?

In Victoria, the legislation requires that every tenant in a building must consent to the EUA. NSW has reached a more appropriate balance as an owner does not need the consent of tenants, however tenants’ contributions cannot exceed a reasonable estimate of the savings they will make under an EUA. The practical effect of the Victorian position means tenants will only consent to an EUA if they too will not pay more, however this appears to add an unnecessary obstacle to forming an EUA.

The legislation is also complex, particularly in Victoria. Sound legal advice will be invaluable to help navigate these early days of EUAs.

Why are they important?

Although EUAs have only been introduced in Victoria and NSW, it is expected that other Australian states will follow. As a sign of their importance moving forward, the City of Melbourne aims to retrofit 1200 buildings.

The diversity of parties to an EUA means that local councils, commercial landlords and their tenants should all be aware of EUAs and their benefits. Hunt & Hunt is well placed to advise on EUAs due to our extensive leasing and local government expertise.