UK: The CRC Energy Efficiency Scheme - How Will This Affect Landlords And Tenants?


The Carbon Reduction Commitment Energy Efficiency Scheme ("CRC") is a mandatory carbon trading scheme for large non-energy intensive businesses and public sector organisations which is primarily designed to reduce carbon emissions and encourage energy efficiency and carbon reporting. Registration for the CRC is required between April and September 2010.

The CRC is based on a "cap and trade" system. Participants will need to estimate their CO2 emissions from all of their energy sources in each compliance year and buy allowances to cover their actual energy consumption. The first sale of allowances from the Government will take place in April 2011 at a fixed price. Thereafter, a "cap and trade" phase will begin in April 2013 when the total pool of allowances for all Participants will be capped and sold at auction. This limitation of allowances will provide a strong practical incentive for participants to reduce their carbon footprint.

Revenue obtained from the CRC will be recycled back to Participants according to their position in a Performance League Table. There will therefore be strong financial and reputational drivers for Participants to reduce emissions and implement sustainable energy reduction measures in buildings.

It is estimated that the CRC will avoid 40 million tonnes of carbon emissions annually and also save Participants £1 billion a year from 2020.

Participants who will be affected?

Any organisation whose energy usage exceeded 6,000MWh of half-hourly metered electricity between 01 January 2008 and 31 December 2008 will be obliged to register with the Environment Agency as a CRC Participant. In general terms this affects those businesses with an annual electricity bill of more than £500,000 (based on 2009 average energy prices), thought to be around 5000 organisations who account for approximately 10% of the UK's total carbon dioxide emissions. Approximately 15,000 other organisations with half-hourly meters and electricity consumption lower than 6,000MWh will need to register as Information Declarers and provide on-line information.

How will the costs be allocated between landlords and tenants?

In rented properties, under the latest government proposals it is the party which is "responsible for the energy supply" that has to comply with the CRC. If a landlord receives the energy supply (even if a facilities management company is the actual party to the energy supply contract) and provides energy to the tenants (as in most multi-let buildings) then it will be the landlord who will be responsible for complying with the CRC. Following extensive consultation the government has taken the view that landlords can influence the energy consumption of tenants and that this is the simplest way to administer the CRC.

Therefore, in the majority of cases landlords will be responsible for their tenants' emissions at a property and will therefore have to buy allowances (and potentially receive revenue recycling payments) depending on the tenants' energy consumption. The landlord may therefore wish to recoup the cost of purchasing the requisite allowances, together with the associated administrative and reporting costs, from their tenants.

Where costs and benefits arise through the CRC the Government has provided no mechanism for voluntary transfer of the landlord's legal obligations to its tenants and considers this to be a contractual matter for negotiation between the parties. This raises several key issues for lease negotiations and for due diligence in property transactions:

Will tenants agree to cover the administrative costs of the landlord's participation in the CRC? If so, should these costs be allocated through increased service charges?

  • Should the landlord consider incentivising its tenants to reduce their energy consumption? For example, should landlords return any CRC bonuses to tenants or invest the money in building or efficiency improvements?
  • As the CRC applies to whole organisations (with potentially many subsidiaries and a sizeable property portfolio) rather than at an individual building level, how will the CRC costs and revenue recycling payments be calculated and allocated fairly to tenants across that portfolio?
  • How should existing and new leases address the CRC in service charge and rent review provisions?
  • Would it be unreasonable for a landlord to withhold consent to assignment, alteration or sub-letting if it has concerns about a tenant's energy use?
  • Should a tenant be penalised if the landlord is late in buying allowances or increases CRC participation costs by having to trade on the secondary market?
  • How should CRC be dealt with on lease assignment or sale of a building? In some cases a landlord may need to return recycling payments to former tenants.
  • Even if neither party is currently subject to the CRC, what will happen if the building is sold or the lease assigned to a CRC participant?

A cross-industry CRC working party will shortly be issuing a consultation paper on potential standard lease provisions. In the meantime, landlords and tenants are generally being left to devise their own solutions.

One option might be for a landlord to decide to absorb its tenant's CRC costs and keep the bonuses to reduce the landlord's administrative and legal costs. Alternatively, where a whole building is let to one occupier, the landlord may look to the tenant to become "responsible for the energy supply".

Another option currently being considered is to estimate a CRC Fund, or agree a separate memorandum of understanding whereby the tenants accept liability for a proportion of the landlord's costs of participating in the CRC. These provisions can take effect during the term of an existing lease and be consolidated when a new lease is completed. However, these provisions will not be binding on successor tenants.

Penalties for non-compliance

Initially, "light touch" regulation is advocated to ensure compliance with the CRC but there are a number of potential civil and even criminal penalties for non compliance. The civil penalties can range from fixed fines, variables fines, publication of non-compliance and blocking the trading accounts of participants.

Failure to register for the CRC by the required date triggers a substantial fine, which may increase incrementally at a daily rate until registration takes place or the next reporting deadline is reached.

As the scheme matures, there will be two main sanctions for Participants that fail to reduce emissions or control their tenants' emissions. The first will be a low ranking in the Performance League Table with associated adverse reputational implications. The second will be the likely reduction over time in the number of allowances which will therefore become more costly to acquire. For poorer performing tenants, there may also be difficulties in securing favourable renewal terms or references.


As the CRC comes into force it is important that both landlords and tenants recognise their responsibilities and consider as early as possible how they might be affected by and prepare for the CRC. Failure to act promptly may have adverse financial and reputational implications.

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.

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