Isra-Mart srl:Carbon Reduction Commitment leaves landlords in legal limbo, says Jon Vivian

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In the Comprehensive Spending Review last October, the government announced that the sale of CRC allowances would no longer be recycled back to participants of the scheme, but would instead be used to support public finances.

The government is under huge pressure to reduce the budget deficit and the announcement marked a significant departure from the scheme as previously introduced, as revenue neutral. Industry bodies have severely criticised the announcement, which has been described as a stealth tax.

Details are still to be worked up about how the revised scheme will be implemented, but a great deal of work had been undertaken in connection with the revenue-recycling payment, and the revised arrangements will have a significant impact on the relationship between landlord and tenant.

The way we were …

Previously, the revenue recycling repayments that were due to be received by participants were to be based on actual emissions that had taken place and their position in a league table relating to these.

In multi-let buildings, the landlord was to be responsible for buying allowances, which were to be recycled at a neutral cost. The issue the industry had been seeking to address over the last two years is how the scheme would fit into the contractual relationship between landlord and tenant.

The prevailing view was that, because the scheme was revenue neutral, existing standard lease provisions that dealt with the payment of taxes or outgoings would not permit a landlord to recover costs from its tenant.

The previous position was that many landlords decided not to try to recoup the cost of CRC because of the difficulty of negotiating the changed position with tenants and the prohibitive cost of calculating and collecting contributions.

There has been some drafting in leases to allow landlords to recover a proportion of CRC costs, where the landlord agreed to make available to the tenant the relevant recycling payment.

Power responsibility

The accounting of the costs of CRC to support public finances instead of revenue recycling gives the scheme the appearance of a carbon tax. Landlords should scrutinise their existing documentation carefully, the tenant covenants in leases that relate to the payment of taxes and outgoings in particular.

Landlords will face arguments that the cost of purchasing the CRC allowances is not consistent with the relevant drafting of their leases and therefore tenants are not liable to pay.

For leases that have come into effect since the original CRC scheme was outlined, which provided that tenants should pay towards the cost of allowances on the understanding that the landlord will account for a due proportion of the revenue-recycling payments, it seems that tenants will be required to contribute to costs, but with no revenue-recycling payment from their landlords to mitigate the position.

There has been some suggestion that the removal of the revenue-recycling payment is a change to the original laws and will require further legislation, which the government, at this stage, has not obtained. It is unlikely that any challenge on this basis will have a lasting effect, as the purchase of allowances will generate £1bn of revenue for the government.