Commercial landlords have been wrestling with the terms of the CRC Energy Efficiency Scheme (the "CRC Scheme") since its introduction in April 2010 under the Climate Change Act 2008. The particular issue for landlords arises from the difficulties in passing CRC Scheme cost on to tenants.
The CRC Scheme requires organisations who consume more than 6,000mWh (broadly those who spend over £500,000 in the qualifying year 2008) to register in the Scheme and purchase carbon allowances in respect of qualifying energy consumption. Those who managed to reduce their consumption were to receive recycling payments plus a bonus in reward for good performance.
However, as part of the Spending Review 2010 it was announced that changes would be made to the CRC Scheme, the most significant being the abolition of revenue recycling. Cash received from the sale of allowances will now be taken by the Government as taxation revenue. The stated intention is to deliver a clear carbon price to the market: but most commentators have seen through this and regard the change as a way to secure sizeable additional revenues to the public purse without raising the rates of the headline taxes.
As it currently stands, the Government has no statutory basis to retain CRC Scheme allowances. New primary and secondary legislation will have to be made to enable this to happen and, following that, it is expected that landlords will look to the service charge recovery drafting in commercial leases to seek to recover direct costs and taxes.
Landlords will need to consider what costs it will seek to pass through and what administration costs are appropriate. In doing so, they will need to pay regard to the RICS's Service Charge Code which has been endorsed by the BPF, BRC, BCO, BCSC and PMA. This code requires both transparency and fair treatment.
DECC's November consultation
In November 2010 the Department of Energy and Climate Change ("DECC") launched a mini-consultation proposing some minor changes to the CRC Scheme pending a more fundamental review. Only six changes were proposed and, whilst four of these are neutral to participants, it is very disappointing that Government failed properly to take on board stakeholder concerns at this stage and respond with more substantive proposals, particularly regarding complex property owning structures.
What is Wedlake Bell's view of the best way forward?
The CRC Scheme was designed as a "cap and trade" scheme to drive behavioural change on the basis that abatement would be more economically advantageous than the purchase of carbon allowances which would come from a limited supply. This fundamental cap and trade element has been removed together with the revenue recycling.
Accordingly, we believe that the Government now has an opportunity to reverse some of the confusion it has caused by abolishing the CRC Scheme and replacing it with the following:
- mandatory and standardised carbon reporting for all companies above an agreed turnover threshold for accounting periods commencing from 1 April 2012;
- merging CRC Scheme carbon allowances into the already existing climate change levy system (which is collected by energy suppliers); and
- expanding use of "display energy certificates" to all but the smallest commercial property (whether owned or let).
This three pronged approach would be just as effective, would operate at significantly lower cost and would drive behavioural change through the lens of publicity.
Need for a clear CRC Scheme policy
We have encouraged both the Minister and DECC to deliver a clear signal to the market as soon as possible. Given the confusion and policy U-turns that have become the hallmark of CRC Scheme policy, this is long overdue.
The Government has imposed significant and unnecessary costs on businesses to date in relation to the CRC Scheme. This has damaged the dividend of goodwill that should exist regarding this and other initiatives to facilitate the migration of the United Kingdom to a low carbon economy.
How should commercial landlords proceed from here?
The market will need to wait for the new law to be enacted for effective drafting in leases to emerge. In the meantime, whilst that new law is awaited, landlords cannot assume that standard drafting will enable them and their successors to pass on all the CRC Scheme costs. To optimise their chances of recovering those costs landlords are best advised to add specific drafting to any new lease being granted, if it can be negotiated with the tenant.
Principally, landlords should:
- insert in the Rates Clause an obligation on the tenant to pay a fair proportion of any costs charges or levies incurred by the landlord pursuant to the CRC's Scheme "in connection with the occupation of the property".
- insert in the Service Charge Provisions a reference to CRC Scheme Costs as an additional service charge item, to include not just taxes and levies incurred by the landlord in connection with the occupation of the premises but also the landlord's administrative costs in dealing with the Scheme.
Inevitably, the definition of CRC Scheme will need to be wide enough to encompass the new legislation we are about to receive but until the new law has been enacted considerable uncertainty will remain for those landlord organisations caught by the Scheme.