Real Estate Legal Update : Global Corporate Real Estate Property and Planning Lawyer & Attorney : Reed Smith Law Firm

As originally envisaged, the CRC was going to reward those cutting their carbon emissions by refunding them the cost of their allowances many months after they had originally bought them. Plenty of controversy arose as to how this was going to be measured and calculated but the original idea of the CRC was that it was revenue neutral for the UK Government.

Not surprisingly, given the state of the UK economy, the proceeds from selling the carbon allowances will now form part of the public finances. Here at Reed Smith we had been expecting that.

There is no doubt that businesses, particularly those with a keen interest in green issues, will be disappointed by the loss of the refund for those improving their emissions. They will see their costs increasing. On a tiny positive note, the change means that businesses will know with more certainty at the start of each year what the CRC will cost. We wonder if more landlords will now try harder to get tenants to pay a share of the building’s CRC costs now the complex refund provisions have been abolished.

The recent report from the Committee on Climate Change on reducing the complexities of the CRC is already out of date and we await developments but, in the meantime, any business that thinks it has to comply but missed the September deadline for registration should still work on their compliance process. See our posting outlining the CRC Scheme if you are still unsure.

We have saved the good news until last! The only sweetener that the Government have offered is that the first sale of allowances to cover the CRC year 2011 - 2012 will now take place in 2012 and not 2011 as previously planned.

For advice or to arrange a client workshop get in touch with your usual contact at Reed Smith or the authors.

STEP 1 - indentify which companies were in your corporate group as at 31 December 2008. If there are none but you ran a business in the UK you will still fall within the legislation.

STEP 2 - identify any half hourly meters that supplied your UK businesses with electricity in 2008. If you had no half hourly meters in 2008 then you will not fall within the first phase of the CRC. If you had at least one half hourly meter then you will have to comply with the CRC Regulations in one of three ways (discussed below after Step 4).

STEP 3 - identify what energy supplies your UK businesses are responsible for (and this includes direct supplies and self supplies). Generally the organisation that is responsible for the energy supply will be the party who will need to report on that energy supply for CRC purposes although there are some exceptions to this.

STEP 4 - having identified through steps 1 - 3 that you are required to comply with the CRC Order, the next stage is to establish whether you have to comply in full or have reporting obligations and this will depend on how much electricity you consumed through your half hourly meters in 2008 -

Consumption of up to 3,000 MWh will mean you have to register at the CRC online registry and supply information about the meters.

Consumption between 3,000 MWh up to 6,000 MWh means you have an obligation to register and supply information about your group’s UK electricity consumption.

Consumption of 6,000 MWh + requires full compliance including detailed reporting of most carbon emissions for your business and from April 2011 buying allowances for each tonne of CO2 you expect to emit each year. These allowances will be sold at a fixed price initially but after two years available allowances will be capped and allowances will have to be bought at auction.

This posting is hugely simplified to create signposts for what should be done. There are many complications around what you can exclude from the supply figures, what happens to franchise businesses, the landlord/tenant relationship issues, detailed reporting requirements and all of the penalties that can apply if you breach the CRC Order. The point of the posting is just to help businesses to decide if CRC is something that can be ignored or something to be looked into more closely.

The Environment Agency, who oversees the CRC, has a lot of useful information. Also, the Department of Energy and Climate Change’s user guide is, well, quite useful.

We have a specialist team who can advise on the impact of the CRC and we are offering seminars and workshops to existing clients. Get in touch with your usual Reed Smith contact or the authors for details.

From now on, sellers should expect any buyer to ask them about the fuel consumption of a building. Some investors already know they have to comply with the first phase of the CRC.   These are the UK groups of companies which consumed over 6,000 MWh of electricity in 2008 through half-hourly meters. Many of them will have been gearing up for the CRC for a while, but some investors, particularly those who do not themselves have to comply with this phase, will be shocked by what is to come.

The question of how significant the building’s carbon emissions will be on a sale will depend on whether the buyer is affected by the CRC – if it is, then the seller is likely to be asked the questions below. In addition, where a buyer does not at the time of the purchase fall within the CRC, it may be asking the same questions to check whether or not the proposed purchase will push it into the CRC for the next phase (seven years from 1 April 2013). Seller’s agents may therefore want to find out the buyer’s CRC status early on in the process.

In either of these scenarios, the seller will have to answer questions on -

• who has the responsibility for the supply of fuels to the building (often in multi-let properties this will be the investor);
• the nature of the electricity and gas meters;
• fuel consumption figures for the building broken down between individual fuel types and meters (where the seller is in the CRC);
• whether the tenants are covering some or all of the CRC compliance costs (many existing leases will not allow the landlords to recover those costs and the BPF have been consulting the property industry on that subject. The subject is fiendishly complex where landlords supply electricity or gas to their tenants because the Regulations apply at group level of the Landlord and not in relation to individual properties).

This posting is not intended to be a detailed analysis on the CRC. Our previous environmental updates will help with that. We have a specialist team who can advise on the impact of the CRC and we are offering seminars and workshops to existing clients. Contact your usual Reed Smith attorney or the authors for details.