UK: The New RICS Service Charge Code Has Been Unleashed; What Does This Mean For Commercial Real Estate’s Environmental Performance?

Will the modifications relating to environmental sustainability in the recent (3rd) edition of the Service Charge Code help to drive change? Whilst there have not been any fundamental changes, some additional guidance has been provided specifically around green leases, Carbon Reduction Commitment Energy Efficiency Scheme (CRC), improving environmental performance and Energy Performance Certificates (EPC's). I would argue that the updates can only be regarded as a good thing for commercial property.

In terms of green leases, it is recommended that owners and occupiers collaborate to manage energy efficiency. The benefits of the two parties entering into Memoranda of Understanding (MoUs) are highlighted as just such a means of jointly addressing the responsibilities of improved energy efficiency. Despite MoUs not being legally binding, they are surely a reasonable opportunity to encourage greater dialogue.

There have been many debates about how the costs of the CRC should be appropriately borne by owners and occupiers whereby amicable resolution will likely depend on unambiguous clauses in the lease. The Code states that "there should be a fair and reasonable approach in the apportionment and recovery of CRC costs between owners and occupiers". Whilst some specific considerations are included, the often complex arrangements of owner and occupier energy consumption and metering could leave the guidance open to interpretation; just the other day a colleague and I discussed how we might have been able to consistently apply the guidance to our respective and diverging managed property scenarios. As the new guidance recognises, 'openness and transparency' are prerequisites of owner-occupier cooperation.

Many commercial property owners and managers will be familiar with the challenges sometimes faced with justifying improvement costs in the context of improving building energy efficiency, particularly during trends of ever shortening lease lengths and the strictures of leases which relate to what is service charge recoverable in terms of replacement and enhancement of plant and equipment. With the potential impact of Minimum Energy Performance Standards now a prominent issue in the market, owners and their managing agents are exploring best practice and engaging with occupiers to identify EPC risks and improve environmental performance.

Those expecting the new guidance to magically solve all these issues will be disappointed. The manifold permutations of owner and occupier arrangements would surely make enacting the Code's best practice unworkable if it were overly prescriptive? Given that it is perhaps slightly ambiguous and leaves some room for interpretation could be a good thing as it should encourage open discussion and negotiation.

Those in the commercial property sector will likely be all too familiar with the challenges of squaring lease clauses and payback periods in the context of the historic 'prevailing culture' of distrust between owners and occupiers. From our perspective as a service provider, we have an important role in facilitating collaboration; as the BBP1 rightly suggests, the agent is in a perfect position to match owner provisions with occupier demands.

All this should put more emphasis on communication; the guidance won't solve either the problems of the legalities of existing leases nor the issue of payback periods outlasting leases. I am inclined to agree with the consensus of opinion found in the IPF's research which indicated that the lease itself should not be viewed as the main obstacle but how they are interpreted. Clearly this is something to be dealt with at the lease negotiation stage and might be easier said than done if a lease has already been signed. Nonetheless, this prerequisite for improved owner-occupier cooperation arguably embodies what the Code is striving to promote.

Footnotes

1 Managing Agents Sustainability Toolkit. Better Buildings Partnership (2011)

2  Greening Leases: The Landlord and Tenant Relationship as a Driver for Sustainability. IPF (2009)

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