The Carbon Reduction Commitment, now named the CRC Energy Efficiency Scheme, is going to drive a ‘green’ energy efficiency agenda deep into the commercial property sector. There are risks to cash flow, your bottom line and reputation for any organisation that falls within the Scheme. The scheme requires an in-depth knowledge to avoid these risks and turn them into opportunities to save money. For smart players there are also opportunities to make money from trading in the Scheme. But this e-briefing is about the implications for commercial landlords and tenants.
What’s it got to do with me?
For landlords and tenants the Scheme adds urgency to the debate around so called ‘green’ leases. These are leases whose clauses take account of energy efficiency issues and the cost risks introduced by the new Scheme. Energy usage is about to cost more, with Ofgem predicting a 25% increase energy costs by 2020. The bottom line is that organisations that fall within the Scheme should be reviewing their leases to make sure they manage how the cost is shared.
The issues involved centre on the energy efficiency of buildings, and the energy usage and behaviours of tenants and others who use the buildings. The cost risks involved are those associated with inefficiencies. In practice neither the landlord nor tenant has full control over the energy efficiency of buildings and neither is keen to pay for the energy usage outside of their control.
Timescales for greening your leases
Now is a good time if you want to fully manage the risk. Organisations that belong to the Scheme have to register before September 2010.
I’m a landlord – what are the issues?
You might be subject to the Scheme - it depends on your billed electricity consumption. The party named on the energy supply contract is responsible for the energy usage. You are particularly likely to be caught if you pay the electricity bill for your building then pass on the cost, for example, via service charge. In the commercial sector, typically this will affect landlords of office blocks and shopping centres.
The implications for landlords in the Scheme are perhaps big enough for you to re-evaluate your business model. Tenants will give careful scrutiny because the Scheme is likely to increase costs, and they will want to avoid paying for inefficiency. There may be a push for you to improve your league table position, to improve energy efficiency across your portfolio, and to bear the cost. Energy-lean tenants may feel at risk of paying higher bills caused by tenants whose businesses require more energy, or who are wasteful.
You will need rights, taking account of the influencing factors, to pass on financial risk, and you will need to measure individual tenants’ energy usage. You should also reserve wider rights under the lease to give you control over wasteful behaviours, so you can proactively manage your league table position as well as the cost outcomes.
Whether or not you are subject to the Scheme, some of your tenants might be. As well as needing to control their own behaviours to improve their energy efficiency, such tenants may seek landlords who invest in energy-efficient infrastructure. If you are in a market where tenants are big users of electricity, and you do not invest, the attractiveness and possibly the rental value of your units could go down within that market, as RICS has recently recognised (see www.sherpamedia.nl/player/player2.0.cfm?c=PropertNL%20Forum%20januari%202010&s=647&aday=20100121 for thoughts about rental premiums).
In multi-tenanted serviced offices there could be complexity for landlords to manage, where some tenants perform better than others. You will need the lease to provide a means of ensuring that tenants who cause costs pay for them, but you can expect demands for transparency and fairness. The Scheme may lead you to adjust your ‘ideal tenant’ profile. Tenants will increasingly seek a link between energy efficiency (or not) and the level of rent and service charge.
I’m a tenant – what should I expect?
You need to ask your landlord if it is caught by the Scheme. If your landlord is caught, you should expect to pay for energy wastage by your business or staff. You will not want to pay, directly or indirectly, for energy inefficiencies on the part of the landlord or its other tenants.
The size of the charge that the landlord wants to pass down will depend on your landlord’s league table position. You will want to keep the price for your energy usage close to a reasonable market rate for power, and avoid inflation due to your landlord or fellow tenants. You need to watch out for pricing systems including service charges that, whether the landlord intends or not, give you an inappropriate, unfair or arbitrary slice of the risk. It takes a good knowledge of the Scheme to achieve this.
You also need to know if you are caught by the Scheme. If you are, you will want the ability under the lease to drive the landlord to invest, and keep investing during the lease term, in energy efficient infrastructure.
Bottom line
Both landlords and their tenants must work together to take advantage of the opportunities from the Scheme or incur significant reputational and financial implications. The cost of carbon-consuming energy is only going to go up.
Learn more about the Carbon Reduction Commitment and meet the experts from our firm and the consultants we work with at our seminar on 17 March 2010 - further details to follow.
For further information, please contact David Hall, Senior Associate, on 0121 212 7469 or email david.hall@anthonycollins.com.