Suzanne Gill: Carbon tax change may bring hot air

Published on Thursday 4 November 2010 12:54

Last month, the government announced controversial changes to the carbon tax levied under the Carbon Reduction Commitment.

Under the original version of the tax, which is based on how much electricity is consumed within a building, funds raised from the largest emitters of carbon were intended to be used to reduce or cancel out the bills of best-performers - making it revenue neutral for the Treasury. However, the "green tax" now looks likely to apply to all companies according to the amount of carbon they produce.

It is believed that this could generate up to 1 billion in revenue for the government - and create tensions between landlords and tenants over who foots the bill.

Businesses across Scotland have understandably been fairly vocal about the negative impact this could have on economic growth. Organisations (which could be either commercial property landlords or their tenants) whose annual electricity bills exceed 500,000 will be liable.

Approximately 5,000 organisations, and potentially tens of thousands of occupiers, are likely to be affected. According to figures put together by PricewaterhouseCoopers, a business with an average gas and electricity bill of 1 million will pay around 76,000 in the first year, rising to 114,000 per year by 2015.

The figures are staggering, and it's perfectly possible that with such eye watering sums at stake, landlords and tenants could find themselves facing up to some very difficult conversations over who should foot the bill.

Exacerbating the issue is the fact that a massive grey area exists. In most leases it is unclear how liability for this new tax should be apportioned. Originally, because the tax bill was so low, the impact on service charges was negligible and therefore unlikely to cause any issues or be allowed for within a lease. This is no longer the case.

When the new regime comes into effect, it seems reasonable to suggest that landlords may look to pass on the cost to their tenants through increased service charges.

However, calculating how much electricity each tenant has consumed can be extremely difficult. In many office buildings tenants have their own electricity sub-meter. The landlord can tell, with a bit of work, how much electricity each tenant has used.

Yet tenants have no way of knowing how many buildings their landlord owns, and whether or not the landlord is liable to pay CRC. As a result it would be difficult to figure out whether any increases in charges are fair or proportionate.

Unless properly-managed, disputes are bound to arise and litigation is a distinct possibility.Businesses about to enter into leases for new premises should bear this in mind when negotiating terms.

For those existing tenants, the advice would be to contact landlords at the earliest possible opportunity to enter into discussions about how they plan to deal with the new obligations.

• Suzanne Gill is a Partner at UK law firm McGrigors

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