The Treasury’s spending review includes two important announcements concerning the future of the Carbon Reduction Commitment (CRC) energy efficiency scheme. The sale of allowances for 2011-12 emissions is being delayed until 2012. In addition, receipts from sales will be used to support public finances. In other words, “revenue recycling payments”, which were to be used to provide “cash back” to CRC participants to encourage them to reduce energy consumption, are being scrapped.
Participation in the scheme will therefore become more expensive, unless the government reduces the cost of allowances (which will be priced at £12 per tonne in the first phase of the scheme and will then be capped and auctioned, unless there is another change in plan in response to the recommendations of the committee set up to advise the government on climate change). However, the way in which landlords apportion CRC costs to tenants should become easier.
Under the scheme, landlords that purchase and supply energy to areas occupied or used by tenants will be responsible for purchasing carbon allowances for the energy consumed in those areas and will be unable to transfer responsibility for compliance to their tenants. Consequently, the property industry has been debating how leases should be adapted to cater for participation in the scheme. See here.
One of the issues that has been causing particular difficulty is how landlords should account for revenue recycling payments to tenants. CRC liabilities are calculated by reference to organisations, not properties. Consequently, tenants have been concerned about the adverse effects of profligate energy use elsewhere in the landlord’s portfolio (or by other members of the landlord’s organisation) on their entitlement to recycling payments. The fact that revenue recycling payments might have been payable to another member of the landlord’s organisation would have provided yet another challenge, as would changes of ownership resulting from the sales of leases and reversions. Potential mismatches between landlords’ service charge years and CRC accounting years gave additional cause for concern.
As a result, the property industry has been unable to agree how to deal with liability for CRC. This has prompted concern that the presence – or absence – of CRC provisions in leases could cause valuation problems for landlords and tenants. However, the simplification of the scheme could put paid to these difficulties and result in increased pressure from landlords for CRC provisions in leases requiring tenants to pay for the cost of carbon allowances purchased in respect of the energy that they consume.
One of the questions that is already being asked is whether landlords can rely on existing covenants in leases to aid CRC recovery now that the CRC is being transformed into a tax. This will obviously depend on the wording of the covenants in the lease in question. However, the legislation attaches liability to landlords that supply energy to tenants (and not to their properties or the tenants that occupy them). Consequently, landlords would be well advised to cover the point expressly to put paid to any legal arguments and safeguard their income.
Allyson Colby is a property law consultant
