HM Treasury announced on 16 July that for its purposes, and in order to meet its targets to increase the levels of environmental tax generally, the allowances due under the Carbon Reduction Commitment Energy Efficiency Scheme (CRCEES) have been classified as an environmental tax. Does this mean, then, that landlords can recover the costs of the CRCEES even if no specific reference is made to it in the lease?
As with everything to do with CRCEES, the answer is not straightforward. Whether or not a landlord will be able to recover cots, will still come down to the interpretation of the lease itself and in particular the outgoings the landlord is entitled to recover. In fact, HM Treasury has confirmed that in defining the CRCEES as a tax it was not intending to provide landlords with an easy route to resolving this issue.
The main obstacle landlords will have when recovering CRCEES allowances remains that the CRCEES is not levied on the property. It is levied on the landlord’s parent companies’ consumption of energy throughout its portfolio. It may be possible to apportion this fairly, but demonstrating the fairness of this apportionment may be difficult: landlords are not likely to want to provide a transparent record of their entire portfolio of properties to every tenant, nor are they likely to want to share information regarding the energy consumption of each of their buildings.
In addition, most outgoings clauses define the recoverable outgoings as those assessed on the property, not on the landlord’s corporate identity. Although it may be argued that the allowances are based on the energy consumption of each property, the “tax” is actually assessed on the performance of the ultimate UK parent company of the landlord. Therefore the landlord may have no legal liability to pay the CRCEES at all and the payee may well have no commercial relationship with the tenant at all.
Landlords may argue that on a moral basis, if they can apportion the tax fairly, then the clause should be interpreted on the basis that the costs of the CRCEES allowances should be recoverable from the tenant as it is only fair for the tenant to pay for the full costs of their own usage of energy and this should include the costs associated with the CRCEES.
They could argue further that if a landlord cannot recover the cost from the tenant, this defeats the purpose of the legislation as the tenant has no incentive to increase its energy efficiency. But, if an individual building is only within the scheme due to other buildings the landlord or its parent company owns, is it still fair for the tenant to bear the cost? And, if a Landlord can recover the costs of the CRCEES through the service charge, doesn’t this similarly provide the landlord with a disincentive to improve the energy consumption of the common parts, particularly where such measures may be classed as improvements and not fully recoverable from the tenant? And doesn’t this also defeat the object of the scheme? In fact, this issue goes to the heart of the problems of complexity associated with the CRCEES and why the legislation as it stands may well fail to provide the correct incentives within a landlord and tenant context.
Whatever side of the moral argument you find yourself, the moral argument is not sufficient to win the legal one. How generously a court will interpret the outgoings clauses in existing leases is open for discussion. With allowances only just due to be paid, landlords are still finding their feet and arguments will not yet have reached the stage of litigation. Whether anyone will bother to push the matter to litigation in light of the uncertainty over the future of the CRCEES is another matter. Following the latest government consultation, we await the government’s further proposals for the simplification of the legislation in the autumn to see whether this and other issues can be resolved in this round of “simplification”. If the BPF’s lobbying is successful and the CRCEES turns into a carbon tax payable as part of the energy bill, then there will no longer be so much of an argument as to who should bear the costs.
About the author
Eleanor is an Associate at South Coast law firm Lester Aldridge. She advises in relation to many areas of property work including acquisitions and disposals, landlord and tenant work and development. Eleanor’s main hobby is ballroom and Latin American dancing and she can be found on a dance floor at the slightest opportunity.
www.lester-aldridge.co.uk
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