Mandatory disclosure of energy ratings
The Federal Government will introduce a ‘mandatory disclosure’ scheme relating to the energy efficiency ratings of most commercial office buildings. As PETER CRAWFORD and VANESSA RITZINGER from the law firm Madgwicks explain, the scheme will affect the management, lease and sale of office space across the nation.
The efficient use of energy by consumers is one of the many ways that Australians can assist in the reduction of greenhouse gas emissions. While commercial buildings account for at least 10 percent of Australia’s greenhouse gas emissions each year, commercial buildings will not be covered by the proposed Carbon Pollution Reduction Scheme. Accordingly, the Federal Government intends to encourage reduction of greenhouse gas emissions in this sector through increased energy efficiency by enacting new legislation. This legislation will require disclosure of energy efficiency in commercial offices that meet certain criteria, providing prospective tenants and purchasers of those buildings with information to enable them to consider the environmental consequences of their new lease or purchase. The parameters of the proposed legislation are examined in a consultation report dated 18 December 2008 
OVERVIEW OF PROPOSED SCHEME
The scheme is expected to commence during 2010.
It will apply to:
- sale, lease or sublease transactions in
- commercial buildings (based on their intended design, not tenancy mix ), where
- the owners or lessors are corporations, and
- the building, or any part of the building, has a net lettable area above 2000 square metres.
The scheme will also apply to participants on an ‘opt-in’ basis where the relevant building is not considered to be commercial, or where the building is commercial, but where the owner or lessor is not a corporation.
Where the criteria are satisfied, or a building owner ‘opts in’ to the scheme, disclosure of a combination of energy efficiency rating, energy efficiency certificate or an assessment report must be:
- referred to in any advertising of the sale or letting of the building or part thereof
- provided to prospective tenants or purchasers, and
- provided to a central registry.
It is proposed that energy efficiency rating certificates will be valid for 12 months and more detailed assessment reports will be valid for seven years. Energy ratings must use the NABERS ratings tool and exclude any benefits received through the use of green power sources such as solar-generated or wind-generated electricity.
NABERS is one of several methods used to provide information about energy use and efficiency in buildings. The consultation report indicated that use of the NABERS tool was preferred because it benchmarks the actual operational energy use of a building per square metre of lettable area rather than just the design features of the building itself. With a maximum NABERS rating of five, a rating of 2.5 is considered ‘average’, while a rating of 4.5 is considered ‘best practice’.
There are only limited exemptions to the scheme, which relate to:
- commercial buildings whose owners or lessors are not corporations (for example, individuals)
- commercial buildings that are less than 12 months old; and
- instances where the relevant transaction is a lease or sublease, and that tenancy is for a period of less than 12 months (inclusive of any further terms).
EFFECT OF SCHEME ON LANDLORDS & TENANTS
The proposed scheme will affect landlords and tenants alike. In principle, both landlord and tenant should consider energy costs and the ways in which energy costs can be reduced.
From the landlord’s perspective, although the majority (if not all) of energy costs can be passed on to the tenant through the lease, energy efficiency will be important to keep energy costs of the base building down. Not only may this result in lower costs to the landlord, but it could be an important drawcard where vacancy rates in commercial offices are high. Energy efficiency may also affect the level of rent. First, a high energy efficiency rating may allow the landlord to capture a premium for energy-efficient building stock. Second, energy efficiency ratings are likely to become important in market rent determinations, and may even become a required criterion in the valuation of market rent in the future.
Similarly for the tenant, the energy efficiency of commercial office space will affect the tenant’s contribution to building outgoings and their own costs for energy consumption, as well as office choice when looking for a tenancy or when it comes time for lease renewal. As explained above, energy efficiency may also be a factor when setting or agreeing to a level of rent.
Leases should be carefully drawn for commercial buildings with either a total net lettable area above 2000 square metres, or where individual tenancies themselves have a net lettable area above 2000 square metres. Issues arising from the scheme that will need to be addressed in the lease include:
- provision of information to satisfy energy efficiency reporting requirements – this may be needed by both landlord and tenant (where the tenant is subletting)
- apportionment of the costs of disclosure, including creating and updating reports and certificates , and administrative costs associated with additional disclosure to prospective tenants or purchasers
- acknowledgement of the receipt of disclosure material on or before viewing the premises or entering into the lease or sublease, and
- correction of, and responsibility for, errors in assessment reports or certificates.
Although the proposed legislation and regulations are yet to be released, considered or passed by the Federal Government it is clear that some form of disclosure about the energy efficiency ratings of commercial buildings will be introduced in the future. It is important that landlords and tenants consider the potential effects of such disclosure now, because it is likely that such requirements will be enacted during the current (or further) term of leases that are currently on foot.
1. Australian Government National Framework for Energy Efficiency ‘Mandatory Disclosure of Commercial Office Building Energy Efficiency’, Consultation Regulation Document, 18 December 2008.
2. Above at [3.31].
3. Note, however, the consultation report indicates that certificates are to be provided to prospective tenants or purchasers free of charge.
Peter Crawford is a partner at Madgwicks, with more than 20 years’ experience in commercial property and general commercial law. He has acted for private and corporate clients in substantial matters involving the acquisition, development, sale, leasing and management of major commercial properties both within Victoria and interstate.
Vanessa Ritzinger is a lawyer at Madgwicks. She joined the firm in May 2008 and works in the commercial property department. Vanessa has experience in advising clients on the acquisition of commercial properties in the areas of hospitality, pharmaceuticals and retail. She has a special interest in emissions trading schemes and sustainable property development.