Introduction to the Green Deal and how it works for commercial property

Introduction

The Green Deal was introduced under powers in the Energy Act 2011 and is a funding mechanism for energy efficiency improvements to property.  The regulations come into force on 28 January 2013, the Green Deal being designed to help the government meet its carbon reduction targets without the need for consumers to pay up-front for energy efficiency measures.  Instead, the works required to improve the energy efficiency of a property will be carried out by a Green Deal Provider and the occupier will pay for the measures under a Green Deal Plan, over time, as part of their energy bill.

The key to whether a measure, or package of measures, is actually financed through the Green Deal is the “Golden Rule”.  The expected financial savings resulting from installing measures must be equal to or greater than the cost of repayment over the term of the Green Deal Plan.  The repayment period may be the lifetime of the measure or a specified “pay-back” period.  If the estimated annual saving is expected to be equal to or greater than the expected annual repayment costs, the Green Deal Plan can be said to meet the Golden Rule and can go ahead.

The Four Steps in brief 

The Green Deal process has four stages:-

1. Assessment 

This is carried out in business premises (or domestic premises) by a Green Deal Adviser or Assessor.  They will use standardised software to identify what energy efficiency or microgeneration improvements can be made and what the financial savings would be, outline how the payments will work, identify which improvements are likely to be cost effective, produce a Green Deal advice report outlining options and declare any links they have with Green Deal Providers;

2. Finance

Once the Green Deal Adviser has provided his report, it can be taken to one or more Green Deal Providers who can arrange and fund the improvements;

3. Installation

A Green Deal Provider will arrange for a Green Deal Installer to come and carry out the work;

4. Repayment

The person responsible for the electricity bill will pay back the cost of the improvements through the electricity bill.  The electricity supplier will pass repayments onto the Green Deal Provider.

There is no cap on the amount of finance a customer can receive through the Green Deal, but the total amount available will be limited by the Golden Rule.

Approved Energy Efficiency Measures

An independent Green Deal Assessor determines what energy efficiency measures would be appropriate for the property from a list of improvement measures which includes:

(a)     Insulation improvements such as:

• Loft insulation
• Solid wall insulation
• Cavity wall insulation
• Draft insulation
• Double glazing windows

(b)     Microgeneration including funding for solar panels, wind turbines and heat pumps.  The cost of microgeneration can vary and will only be funded by the Green Deal if it adheres to the Golden Rule.

Green Deal Providers

The term of the Green Deal Plan is set by the Green Deal Provider who will need to determine the likely annual saving as a result of the recommended works.  The Green Deal Provider then sets a period and level of repayment so that the cost of energy consumed plus the repayments (known as the Green Deal charge) do not exceed the previous cost of energy before the works are undertaken.

The government has formed a Green Deal Finance Company (GDFC) which will supply money in the form of loans to the general public.

The intention is that the members of GDFC (including companies such as British Gas and Carillion) will supply the bulk of the cash needed to get the scheme working.  The government will supply the initial money for the scheme, currently around £200/500 million while the private sector will provide approximately £14 billion which will form the majority of the finance.

The requirements for Green Deal Providers and Installers will be brought together in a Green Deal Code of Practice which the Department of Energy and Climate Change (DECC) is developing.

The effect of the Golden Rule on Property Values

The Green Deal should not have a negative effect on the value of a property, but this will depend upon the Green Deal Assessor (whose assessment report forms the basis of the Green Deal Plan) undertaking its role effectively and the use of the property remaining similar.  For example, a reduction in the number of people occupying a property is likely to cut the amount of energy used and this may push the cost above what might be paid without a Green Deal Plan in place.

Landlord concerns

Landlords approached by the Department of Energy and Climate Change (DECC) in 2011 identified a number of factors that would have an impact upon whether they would consent to tenants carrying out improvements under the scheme.  In particular:-

• queries as to whether the payback periods would be within the period of tenants’ leases;
• the impact of premises becoming void during the payback period (the landlord will then be liable for repayments as payer of the energy bill);
• concerns that the taking out of a Green Deal Plan would affect the freehold value and the market for lettings.

It may be difficult for a tenant to take out a Green Deal Plan and undertake works within a payback period that fits into a short term lease as it is unlikely to comply with the Golden Rule.  The Landlord is unlikely to want to be responsible as payer of the electricity bill once the lease ends.

How do you find out if a Green Deal Plan exists? 

Because the person paying the energy bill is liable to pay the Green Deal charge attached to the property’s energy bill, a purchaser of a freehold and an incoming tenant who is going to pay the bill need to be aware of the existence of any Green Deal Plan.

The Green Deal regulations oblige a seller or landlord to disclose any Green Deal Plan attaching to the property. It is anticipated that changes will be made to the standard preliminary enquiries and CPSEs to include enquiries relating to the Green Deal.

What is the “Golden Rule”

• The cost of repayment should not exceed the estimated financial savings resulting from installing measures.
• The length of the repayment period should not exceed the expected lifetime of the improvements.

Improvements  by the Landlord

If a landlord wishes to enter into a Green Deal Plan while a tenant is in occupation, the landlord may need the tenant’s consent under the terms of an existing lease.  The tenant may be reluctant to provide this consent because of potential disruption of works, even if the tenant accepts that the additional energy cost will be offset by savings made.

If a Landlord wishes to carry out Green Deal works to the common parts, the service charge provisions in the lease may not allow the Green Deal charges to be recharged to tenants as part of the service charge.

The grant of new commercial leases

Because of the current state of the commercial market and the desire to ensure that costs on a letting are kept down as much as possible, little attention has been paid in recent years to energy efficiency measures.

The Energy Act 2011 states that the government must have regulations in force no later than 1 April 2018 that properties with an EPC rating below a set level (not yet confirmed but believed to be “E”) cannot be let until landlords have made “such relevant energy efficiency improvements as are provided by the regulations”.

It is possible that a two-tier market will emerge prior to 2018 (with energy efficient buildings having a “green premium” and inefficient buildings having to apply a “brown discount”).  Tenants will also want to look at the service charge provisions of the lease and whether this enables the landlord to pass on the Green Deal charge for works to the common parts.

If a tenant wishes to carry out Green Deal improvement works:

• all necessary consents will need to be obtained from the landlord;
• the tenant will want to ensure that such works are disregarded on rent review and that the works do not have to be removed at the end of the term.

On the grant of new commercial leases, landlords may wish to consider whether:-

• the landlord wishes to impose an obligation on the tenant to ensure that the energy efficiency of the property does not fall below a specific rating.  This may be an onerous obligation if the rating is currently substantially lower;
• clauses are required to provide that if the tenant enters into a Green Deal Plan, the term of this must not exceed the term of the lease so that the landlord’s marketing of the property is not hampered by having a Green Deal charge attached to it and the landlord does not have to pick up those charges during any void period.  This may be a difficult provision to impose if the lease is of a relatively short term;
• a clause is required to oblige a tenant to pay off the Green Deal charge if the lease term expires early e.g. because a break clause is exercised or the lease surrendered;
• a clause is required permitting the landlord to take up a Green Deal Plan in respect of common parts and obliging the tenants to consent.

Conclusion

It is possible that the Green Deal will have little effect on commercial property until the April 2018 deadline referred to above.

In addition, as many commercial leases are now of five years or less, the Golden Rule is likely to apply only if the payback period is longer than the lease and landlords may not be willing to take on the higher electricity charge after the lease has ended.