UK: Green Is The New Black - Q&A: The CRC Is Changing The Relationship Between Landlords And Tenants

CAN MY LANDLORD RECOVER CRC COSTS?

Question

I am a tenant in a multilet building. Electricity for my premises and the common parts is supplied through the landlord, which participates in the carbon reduction commitment energy efficiency scheme (the CRC). It wants to recover its CRC costs from tenants under a covenant "to pay all taxes, rates, impositions and outgoings payable in respect of the premises". Does this cover the landlord's costs of purchasing CRC allowances and other costs of the scheme?

Answer

It is unclear whether the landlord's CRC costs can be recovered under this common outgoings clause given the novelty and unusual features of the scheme. If the landlord cannot recover under this clause, it may be entitled to do so under the service charge provisions.

Explanation

As a CRC participant, your landlord will, from 2012, be required to purchase and surrender allowances for the CO₂ emissions generated from energy supplies for which it is responsible in respect of buildings that it owns or lets. Since April 2010, it has had to register as a participant and monitor and report on its energy consumption. The CRC was intended to be revenue-neutral; the income received by the government from the sale of allowances was to be recycled to participants to reward energy efficiency. However, last October, it was announced that recycling payments would be abolished. Thus, landlords may seek to pass on the costs of compliance to their tenants: see EG 13 November 2010, p85.

Although CRC allowances have some characteristics of a tax or rate, they differ in being choses in action that can be bought not only from the government but also (as envisaged) from the secondary market and sold on. Thus, they probably fall outside the scope of a tax. Moreover, clauses requiring a tenant to pay taxes, rates or similar may not catch novel charges that the parties had not contemplated when they entered into the lease, unless the clause is worded so as to apply to any future taxes or charges.

CRC allowances are likely to be caught by the word "outgoings", which is broader in scope: see Smith v Smith [1939] 4 All ER 533. You could argue that "outgoings" should be construed with reference to the words "taxes, rates..." that precede it and so is equally inapt, but the landlord will argue that it was used deliberately to expand the reach of the clause.

Your landlord is unlikely to recover its other CRC costs – those incurred in administering the scheme and monitoring and recording consumption or the allowances required for energy usage in the common parts – under an outgoings clause. Instead, it would have to show that this was relevant expenditure under the service charge provisions of the lease; but since these costs may not be building-specific, they may not be caught by such provisions.

WILL A GREEN LEASE MEAN INCREASED COSTS?

Question

My firm wants to move to smaller premises to save money. We are negotiating to take a floor in a modern building. The landlord participates in the CRC scheme and requires a green lease. Will this mean increased costs?

Answer

Adopting a green lease does not necessarily mean increased costs, although this will depend on the level of commitment to environmental issues. Improved energy efficiency is likely to mean that you will benefit from lower energy bills. However, you may have to pay towards the landlord's CRC costs or energy-efficiency works through the service charge provisions of the lease.

Explanation

The increasing reach of the CRC is likely to result in higher demand for green leases. Your landlord will be under pressure to reduce carbon emissions from its buildings and will want to encourage you to be energy-efficient. A green lease is one means of achieving this objective. The term "green lease" is confusing since there is no standard form of green lease. What this means is that your landlord may want to include provisions in the lease that aim to reduce the environmental impact of the premises, in which case the provisions would be legally binding, but it is likely that non-standard remedies for a breach would apply. Alternatively, it might ask you to enter into a voluntary agreement that is separate to the lease. There is room for creativity in the structuring of green leases. If the building is already reasonably eco-friendly, the provisions will probably be concerned with preserving green standards; if not, they may require the parties to adopt green initiatives covering the way in which the building is managed and occupied.

Green lease clauses are often described as light, medium and dark green, which indicates the level of commitment required by the parties and whether the clauses will be legally binding. For example, a light green clause may require basic engagement with environmental issues and legal recourse may not be available in the event of a breach. A dark green clause might stipulate targets on energy efficiency and is likely to be legally binding.

Your landlord's proposals may not have major cost implications. The focus could be on collecting and sharing data on energy and water consumption with a view to improving efficiency. If your landlord is more ambitious, it may want to agree joint targets on recycling, work with you to carry out an energy audit and commit to sustainable sourcing.

The landlord may be open to making changes that are of benefit to you: for example, you could ask for separate metering facilities for your floor. Ultimately, it is in both parties' interests to work together to improve energy efficiency.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.