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The Carbon Reduction Commitment Energy Efficiency Scheme (CRC) comes into force on 1st April 2010. This is part of the Government's drive to meet UK targets for reducing emissions.

As 18% of the UK’s carbon emissions are attributed to non domestic buildings large businesses and the public sector will have to address issues such as lighting, heating and insulation and to make better use of natural light and ventilation in commercial properties.

How does the CRC scheme work?

The CRC applies principally to organisations whose annual electricity bills are in the region of £500,000. These organisations must participate in the CRC but many others will have to submit information about their energy consumption to the scheme administrator (the Environment Agency in England and Wales). Multiple retailers, shopping centres, hotel chains, schools, offices and local authorities will all be subject to the CRC.

The scheme is being introduced in phases, with an introductory phase from 1 April 2010 to 31 March 2013 and subsequent 7 year phases. The introductory phase will see the Government sell an unlimited number of emissions allowances at £12 per tonne of carbon dioxide (CO2). In the later phases a limited number of allowances will be auctioned and additional allowances can be traded amongst the CRC participants. At the end of a compliance year participants must surrender enough allowances to cover their CO2 emissions during that year.

The CRC is not intended as a revenue raiser. Income from the sale of allowances is recycled to the participants. The recycling payments are weighted to incentivise carbon efficiency. Payments are based upon an organisation's position in a league table published annually (from October 2011) by the scheme administrator. Rankings will be determined according to changes in a participant's emissions (either reduced or increased), how that change is related to changes in the participant’s turnover and whether voluntary measures have been taken at the start of the CRC to reduce CO2 emissions. The CRC does not oblige disclosure of information about turnover but disclosure will be necessary to improve upon a league table position and to demonstrate that growth in business has been carbon efficient. No credit is given for the production of on-site renewable energy and allowances will still need to be purchased under the CRC for the use of such energy.

CRC participation involves a significant administrative burden: an initial report at the start of each phase of the scheme (showing which emissions are subject to the scheme); an annual report of emissions; and evidence to support these reports. There may also be the burden of trading allowances.

What does this mean for commercial landlords and their tenants?

Any organisation "responsible for the energy supply" must participate in the scheme. An organisation which buys energy for consumption by another will not usually be considered responsible for the supply for the purpose of the CRC, except in the case of a landlord and a tenant. Landlords are considered to have influence over their tenants' energy consumption so, where a landlord provides energy to its tenant, the landlord must participate.

The scheme gives no guidance on how compliance costs should be divided between landlord and tenant and does not oblige the landlord to pass on the recycling payments. In fact it gives no guidance to them apart from an obligation for tenants to co-operate with landlords for the purpose of complying with the CRC. This leaves the parties free to negotiate their own contractual arrangements.

If a landlord is a company within a group structure the parent undertaking (as defined by the Companies Act 2006) will be the scheme participant. However, a recent change introduced rules on "Significant Group Undertakings" (SGUs) specifically to allow subsidiaries to participate on their own account. The SGU can only do this if it does not result in the rest of the group falling below the CRC qualification requirements.

How does CRC affect existing Landlord and Tenant relationships

Many landlords may decide to bear the costs of the scheme and keep the recycling payments, at least in the early stages until the full practical impact of the CRC is known. Whether costs can in fact be recovered from a tenant under an existing lease will depend entirely upon the drafting of that lease, in particular the covenants dealing with outgoings, utilities and service charges. A tenant paying the costs of the CRC might reasonably expect to receive a share of the recycling payment but existing leases will not provide for that.

Landlords who do pass on the costs and/or recycling payments will have to decide how they are divided between different buildings and, in the case of multi-let properties, between individual tenants.

Apportioning by reference to the energy efficiency of each building and tenant will not be easy. Landlords may prefer to allocate the recycling payments to a general fund for the improvement of buildings and plant rather than paying them to tenants. After all, a tenant with a short term lease is unlikely to spend money improving property it may shortly leave.

What happens if there is a change of Landlord?

If the original landlord was a CRC participant but the new landlord is not, will the tenant be able to recover any recycling payments? Similarly, if both the old and new landlords are CRC participants will the tenant be expected to pay twice for CRC schemes which are administered in different ways?

New leases provide the opportunity to deal with these issues. The CRC gives landlords with the desire to pursue energy efficiency another opportunity to get tenants on board. A British Property Federation joint working party is now considering whether standard lease provisions can be agreed. This may overcome many of the problems left by the lack of guidance in the CRC itself.

Only time will tell whether the environmental benefits of CRC outweigh the environmental costs of administering the scheme.

Abigail Mitchell, Solicitor
Commercial Property Practice
email [email protected]
tel 020 7591 3360

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