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Sustainable development – responding to the challenges of greener buildings
Claudia Watkins and Christopher Woolf
Sustainable development – responding to the challenges of greener buildings
“Development which meets the needs of the present without compromising the ability of future generations to meet their own needs”
Security of energy supply Climate change Sustainable production and consumption Increasing tide of policy and legislation Mandatory and voluntary measures = compliance,
commercial and best practice
Sustainability
Sustainability
EU 6th Environment Action Programme
UN Framework Convention
on Climate Change and Kyoto Protocol
1992 Rio Earth Summit
CSR
UK Climate Change Bill
EU Green Paper on Energy Efficiency
EU and UK SustainableDevelopment Strategy
Sustainability (cont’d)
Financial implications of climate change better understood
Mandatory measures EU ETS and Carbon Reduction Commitment Energy efficiency in Buildings/EPC Sustainable and Secure Buildings Act 2004
Voluntary or good practice Green leases Environmental Management Systems Sustainability codes
Energy Performance of Buildings
Introduction
Governments are trying to increase awareness of, and transparency in, the energy efficiency of buildings
BS:1999453.1
Energy performance of buildings
Energy Performance Certificates to be made available to prospective buyers and tenants on construction, sale or lease of building
Display Energy Certificates in large buildings occupied by public authorities providing services to the public
Regular inspection of boilers and air conditioning systems
Energy Performance Certificates (EPCs)
Information on potential energy performance of building
Asset rating from A to G Allows buyers or tenants to compare energy
performance of buildings Accompanied recommendation report Now required for all commercial and residential
buildings, upon trigger events
EPCs (cont’d)
Trigger events Construction of new building Sale, lease, sub-lease of an existing commercial
building – on the earliest of: seller/landlord providing written information following
request; prospective buyer/tenant viewing; or contract being entered into
Modifications to the building resulting in more or fewer units, and which affect or extend the fixed services
EPCs (cont’d)
Valid for 10 years May be revoked if a new EPC is issued for the
whole building Fine of £5000 for failure to provide Landlord may have difficulty in recouping cost of
producing EPC Tenants may press for reduction in rent if building
has a poor EPC rating May need to instruct energy assessors well in
advance
Display Energy Certificates (DECs)
DEC Based on actual metered energy use of building in
previous 12 months Advisory report listing recommendations Must be displayed in a prominent position
Who does it apply to? Occupiers of all new and existing buildings of more
than 1000m² of useful floor space Occupiers are either public bodies or institutions
providing a public service, and are frequently visited by large numbers of the public
DECs (cont’d)
DEC produced by occupier of building Typical tenant’s covenant to comply with statute
should pick up the obligation to provide a DEC DECs are valid for 12 months and must be renewed
annually
Carbon Reduction Commitment
Carbon Reduction Commitment (CRC) – an outline
Climate Change Bill and strict CO2 emissions reduction target
Carbon Reduction Commitment is a Mandatory UK-wide cap and trade ETS for large, non-
energy intensive businesses and public sector organisations using “core source” energy
2008 is “qualifying year” Starts 2010, introductory phase up to 2013 Announced 2007, Defra consultation June 2007 Consultation on draft regulations awaited Regulations should be in place by 2009 Many outstanding issues
CRC (cont’d)
Which businesses are covered? “CRC organisations” – offices, shops, hotels, rail
operators, hospitals, universities etc Who use “core sources”:
Mandatory half-hourly electricity meters Using >6 000 MWh pa Likely to be included if total annual electricity bill is
£500 000 or more
CRC (cont’d)
Definition of “CRC organisation” Highest UK parent Other arrangements – “counterparty to the energy
supply contract” The 90% requirement
At least 90% of organisation’s total emissions must be covered by either EU ETS, CCA or CRC
Include smaller emissions sources to reach 90% threshold
Once organisation reaches 90%, may voluntarily opt in all/any other sources
CRC (cont’d)
Cap set by government every 5 years Allowances to be auctioned (fixed price, then closed
bid system) in 5 yearly phases from 2013 Businesses to self-certify emissions Gateway into EU ETS but may not sell from CRC
into EU ETS CRC “performance table” and bonuses or penalties Scheme to be revenue neutral to Treasury
Issues for landlords and tenants
Who is responsible in the following situations? (A) – owner/occupier or long-term leaseholder (FRI)
invoiced directly → UK parent co of owner of building or tenant
(B) – sole tenant of large property → UK parent co of owner of property/tenant
(C) – multi-let properties with managing agent/property manager → UK parent of MA/PM co and tenant
Issues for landlords and tenants (cont’d)
Other arrangements being considered: Pass-through of CRC costs/benefits from landlords to
tenants – guidance requested Channelling of CRC revenue recycling payments into
dedicated fund for energy efficiency investment? If landlord and tenant agree before each phase, CRC
responsibility could fall to tenant Lease provisions will have to deal with this Lobbying DECC
Other outstanding issues
Effect of organisation change Subsidiaries/ overseas companies 90% coverage rule unclear Data collection Market design Disincentive to take energy efficiency action before
2009/10? No information on penalties yet Complex issues for companies who may be in EU
ETS and CRC
Issues for landlords and tenants (cont’d)
Actions: Consider if you are likely to fall within this scheme Look out for DECC consultation on detailed
regulations in “late Autumn 2008” Look out for awareness-raising events In early 2009, Environment Agency will send
registration packs to UK billing addresses with half-hourly meters
You may receive information from energy supplier Identify “CRC organisation” Consider how data collection on energy use could be
organised
Green leases
‘Green’ leases - introduction
What is a ‘green’ lease? a commercial lease that places obligations on both
landlords and tenants to use the property efficiently and in a way that promotes sustainability
there are various shades of ‘green’ that can be applied to commercial leases
BS:1999453.1
‘Green’ leases – a closer look
‘Light green’ leases: normal obligations in a commercial lease, but no
barriers to making the building more energy efficient, eg no prohibition on tenant carrying out alterations to improve heating efficiency
generally, no penalties or rewards on either landlord or tenant for achieving sustainable use
‘Green’ leases – a closer look (cont’d)
‘Mid green’ leases: some commitments on both parties, eg a general
environmental management plan to share information and monitor energy use in the building
common goals to minimise carbon footprint failure on either party to perform or maintain
obligations not actionable breach of the lease
‘Green’ leases – a closer look (cont’d)
‘Dark green’ leases: obligations to reach specific targets, eg on energy
and water use, or a target on the landlord to ensure the building achieves a certain energy rating on its EPC
failure by either party will have consequences, eg financial penalties or even forfeiture
landlord could adjust mechanics of the service charge to reflect good practice by tenants
‘dark green’ leases familiar in some US states, and particularly in Australia
‘Green’ leases – landlord’s incentives
Reducing size of air conditioning systems increases lettable space
Lower service charge and running costs – attractive to tenants
Brand enhancement for ‘green’ landlords ‘Future proofing’ Landlord’s own corporate social responsibility profile
‘Green’ leases – barriers for landlord
Inability to recover capital expenditure Uncertainty of covenants which are vague and
general – may not be enforceable in court Typical covenants not yet tested at rent reviews More time policing or liaising with tenant and
monitoring energy use Difficulty in introducing ‘dark green’ leases where
there is no green technology to introduce improvements
‘Green’ leases – barriers for tenant
Tenant with short term view of its occupation may not benefit in terms of lower running costs over a long period
Will ‘green’ lease covenants make lease less attractive on assignment?
Current service charge mechanics discourage energy efficiency
Utility bills small fraction of budget, so landlord charging premium on the basis of lower running costs must show significant energy savings
‘Green’ leases – barriers for tenant (cont’d)
No incentive for landlord to reduce energy usage where leases are on a simple FRI fully recoverable basis
Extra expenditure for tenant and fear that landlord is interfering with tenant’s use of building
‘Green’ leases – incentives for tenant
Potential for reduced energy and fuel costs ‘Green’ lease as part of overall corporate social
responsibility targets
Conclusion
Costs and incentives are a big stumbling block Easier to be ‘green’ in a new building than
refurbishing an existing building Landlords, tenants and advisers are nervous of
accepting unfamiliar covenants Lack of appropriate and widely accepted
benchmarks
Conclusion
Actions
CRC plans going ahead Climate Change firmly in government sights Good practice worth developing Consider how your organisation should respond
Questions?
These are presentation slides only. The information within these slides does not constitute definitive advice and should not be used as the basis for giving definitive advice without checking the primary sources.
Allen & Overy means Allen & Overy LLP and/or its affiliated undertakings. The term partner is used to refer to a member of Allen & Overy LLP or an employee or consultant with equivalent standing and qualifications or an individual with equivalent status in one of Allen & Overy LLP's affiliated undertakings.
Sustainable development – responding to the challenges of greener buildings
Claudia Watkins and Christopher Woolf