It may now be possible for landlords to recover CRC costs under the tenant’s outgoings covenant in a lease with no specific reference to CRC. It will depend on the precise wording of the particular covenant.
The CRC Energy Efficiency Scheme is an emissions trading scheme under which organisations whose energy use exceeds a certain level are required to buy allowances in respect of carbon emissions from their properties. The scheme was intended to be revenue neutral for the Government because the money received was to be returned to scheme participants in proportion to their success in reducing carbon emissions (known as “recycling payments”). However the Government has now scrapped recycling payments prompting suggestions that the scheme is now akin to a tax, so that where leases do not contain specific provisions requiring the tenant to contribute towards the landlord’s CRC costs, those costs could be recovered under the usual tenant’s covenant to pay taxes and other outgoings.
Whether CRC costs are recoverable in that way will depend on the exact wording of the particular outgoings covenant. However, in general terms, the actual cost of buying CRC allowances might be recoverable in some cases but the administrative costs associated with scheme compliance could probably not be included.
Factors which make the recovery of CRC costs under the outgoings covenant less likely include the following.
- Covenant limited to rates and taxes. It is doubtful whether CRC costs can properly be classed a tax because the payment is the price for the purchase of an allowance and because if allowances are bought on the secondary market the cost will not be paid directly to the Government. Even if the payment is not a tax it is nevertheless likely to qualify as an “outgoing”. However, sometimes the way the outgoings clause is drafted will mean that it will only apply to outgoings which are in the nature of a tax, so in those cases CRC costs will probably not fall within the clause.
- Future outgoings not referred to. If the lease was granted before the scheme came into force in April 2010, the outgoings covenant will not cover CRC costs unless it specifically includes both existing and future items. However, most outgoings covenants do include those words.
- Specific link to the premises required. It may not be possible to show that the costs relate to the property because CRC is administered by reference to organisations, rather than particular buildings. Nevertheless, a reasonably strong argument could probably be made out to link the costs to the premises; this will be easier where the scheme participant owns only one building.
- Costs must be incurred by the landlord. Where the landlord is part of a group, CRC costs incurred by a parent company will not be recoverable under a covenant which relates only to costs incurred by the landlord. It may perhaps be possible to overcome this difficulty by the landlord undertaking an obligation to repay to the parent the proportion of costs attributable to the building.
- Ambiguity resolved in landlord’s favour. It is a general rule that if the meaning of a clause is in doubt it should be construed against the interests of the party who drafted the document, which is usually the landlord.
The issue is unlikely to be settled until it is tested in court. In the meantime new leases are increasingly likely to contain specific provisions either requiring tenants to contribute towards CRC costs or expressly excluding such a requirement, depending on the parties’ negotiating strengths.