Shakespeare Was On The Money

He saw it coming in Hamlet.

“Neither a borrower nor a lender be;
For loan oft loses both itself and friend,
And borrowing dulls the edge of husbandry.”

Polonius.  Act 1, Scene III

He had a hard time getting a drink though.

 Shakespeare walks into a bar and asks the barman for a beer. "I can't serve you." says the barman. "You're Bard!"

Merry Christmas and Happy New year!

I’ll be back in 2011.

Hey! What's The Green Deal?

Here is a link to an article by Hammonds on the “Green Deal”, a scheme originally published by the coalition government in May 2010 as the method by which home energy efficiency improvements would be paid for by savings from energy bills.  There is also a useful summary on the business green site and more comment from building.co.uk .

On 9 December 2010 the government confirmed that businesses of all sizes will be able to take advantage of the Green Deal scheme with the publication in parliament of its flagship Energy Bill.

The Hammonds article summarises how this would work. 

In short, buildings have to be assessed and recommended installations carried out by an accredited Green Deal installer. 

The energy provider then collects a Green Deal charge from the consumer as part of the energy bill and passes on the charge to the Green Deal provider. 

The Green Deal charge attaches to the meter, rather than the individual consumer, although the Green Deal provider is not entitled to take a charge over the property to protect this payment.  

Where a property is subject to a Green Deal plan the seller or prospective landlord must disclose the existence of the plan to any prospective buyer or tenant and must secure an acknowledgement from the buyer or tenant that the energy bill payer for the property is liable to make payments under the Green Deal plan.

I wonder how much voluntary take up for this scheme there will be in the commercial sector, which is already grappling with the complexities of the CRC? 

Also, as Hammonds comment, landlords will be reluctant to allow third parties to undertake energy efficiency improvements to their property. The big landowners will be able to finance their own energy efficiency improvements without the need for Government intervention. It is further down the scale where such investment becomes harder to source or justify.

Ultimately there might not be any choice. 

This Government has got the bit between its teeth on environmental issues, especially where they hold out the prospect of job creation. 

Chris Huhne has already predicted that the Green Deal will lead to the creation of 250,000 new jobs. Whether or not that prediction is realistic, politically there is clearly a big potential dividend in persevering with this scheme. Government will be seen to be doing the right thing by both the environment and the jobs market.

In September Mr Huhne trumpeted:-

"The Green Deal will be a revolution. The first scheme of its kind in the developed world. The most ambitious energy-saving plan ever put forward. A once-and-for-all refit that will make every home in Britain ready for a low-carbon future."

Fighting talk. Although it was made to the Liberal Democrat Conference, so he was probably trying to cheer them up!  

Therefore more regulation may be in the offing. 

For owners of the lowest EPC rated properties, the need to improve energy efficiency will grow. If those owners are not caught by the CRC, they may be forced to comply one day with the Green Deal. 

Of course, from an energy efficiency point of view, this should perhaps be regarded as an opportunity rather than a threat, provided the funding is made available. Maybe that’s one for Vince (if he’s still there)...or George!

CRC Energy Efficiency Scheme – Who Pays?

As if there aren’t enough things for landlords and tenants to fall out over when negotiating leases, along comes another one. Who is going to pay for those expensive allowances under the CRC Energy Efficiency Scheme?

This is not going to be an easy issue to resolve. The fundamental thing to remember about CRC is that it works at an organisational level and not at a building level, and so the allowances are a tax on organisations, not on buildings.

It’s the organisation whose name is on the electricity bill that will pay for the allowances.  And there’s the rub. Because the cost of the allowances is worked out at organisational level, CRC does not readily fit into the landlord and tenant relationship.

 That’s fine where the building is let to a single tenant. The tenant’s name will be on the bill; so the tenant will pay.

The difficulty will come with multi-let buildings. They may be buildings where the landlord is only responsible for the common parts (and recovers its costs for those areas via a service charge) or the landlord may be responsible for the whole building (recovering the costs for the whole building via the service charge). In the CRC world, the landlord will be deemed to be responsible for the whole building, but is it fair for the landlord to foot the bill for the allowances when it has little or no control over the electricity consumed by its tenants? Equally is it fair for tenants to have to contribute towards a landlord’s cost that, taken as a whole, might be substantially affected by other buildings within the landlord’s portfolio and the energy consumption of its other tenants? How is this cost to be apportioned fairly?

As you can see, that is why it is going to prove difficult to shoehorn CRC into the conventional structure of the commercial lease.  If negotiating parties get all “positional” on this, there is a danger they are going to tie themselves in knots and waste a lot of time.

Can the cost of CRC be recovered under existing leases?

I think the answer to this will be no. You might think (if you are a landlord) that, with the abolition of the recycling payment, the allowances are basically a tax and so ought to be recoverable under the standard tenant’s covenant to pay all outgoings, taxes etc. However the general concensus amongst property lawyers seems to be that this won’t work because the CRC costs are a tax on organisations, not on property, and it is property specific taxes that those clauses are getting at. CRC also brings with it administrative and management costs, which are likely to be quite considerable in a large portfolio where simply measuring and collating all the information will use up a lot of time. This type of cost is not covered by a standard tenant’s “outgoings” covenant.

I also think it will be difficult for landlords to argue that these costs are recoverable under standard service charge provisions, as this type of cost was not contemplated in the drafting of the commonly encountered service charge heads. It is also unlikely that it would be capable of being gathered up in a general “sweeper” clause.

With the abolition of the recycling payments (before they had even began), landlords are therefore likely to find themselves having to shoulder the burden of CRC costs on multi-let investments.

So how will CRC be dealt with in new leases?

This has been the subject of a lot of debate already. I don’t want to make this post too long, so I’m going to try and post something on this at a later date, and any useful links I find. I suspect that in any event 2011 will see more tinkering with CRC as the Government seem keen to try and simplify it further. Until this is sorted out, detailed drafting (and negotiation) of bespoke CRC lease clauses will be challenging.

More Good Harvest

I stumbled across this excellent piece, Good Harvest v Centaur Services - The Dust Settles,  by my former colleague from Dechert days, Emma Slessenger, now at Allen & Overy, who, as always, gives a wonderfully clear summary of where things stand post Good Harvest (and as confirmed, for now at least, by K/S Victoria Street).

In short, Emma lists the following (my abbreviations of “T” for tenant and “G” for guarantor):-

What no longer works

·         Direct guarantee for incoming T from the G of outgoing T. Either described as an AGA or just a guarantee.

·         Repeat guarantee, where a G acts as a direct guarantor for successive Ts. Most common in group reorganisations, with guarantees from parent company.

What might still work

·         A parallel or sub-guarantee, where outgoing T gives an AGA for incoming T and outgoing T’s contractual G guarantees the AGA (but doubts expressed obiter by the judge in Good Harvest).

What definitely works

·         An AGA given by outgoing T for new T.

·         Contractual guarantee given for current T (unless given by someone who has acted as a G for a previous T).

·         (in old leases granted before 1 Jan 1996) original T liability and, normally, successive Ts’ liability throughout the term of the lease.

·         (in old leases granted before 1 Jan 1996) liability of other contractual Gs for same period as above(unless G has negotiated a specific release).

See Emma’s article for more detail.

See also here for another interesting summary, written more recently, by Anne Waltham of Wragge & Co, especially on the question of whether freely given guarantees (in this context) could be enforeceable or workable in the investment market (probably not).

Build-To-Let

Interesting piece in the Guardian, about the rise of the build-to-let sector.

I was surprised that the average age of a first time buyer is now apparently 37, but less surprised that last year saw the lowest number of new homes built since 1924.


However, some big developers are entering the market to build mass rental homes, so-called "build-to-let", eg Berkeley Group building 555 homes in London and the South over the next two years to be owned and managed by a private rental fund to be set up by Berkeley. The Homes and Communities Agency is encouraging institutional investors into the market. Those mentioned include Aviva, BNP Paribas and Aegon Asset Management.


Over the last 5 years, residential property has generated an average return of 6.8%, far ahead of commercial property at 1.8%.


This is, not surprisingly, a highly emotive subject for some investors and their tenants. The range of angry comments on the Guardian's website demostrates that.

CRC Energy Efficiency Scheme – A Stick With No Carrot

Today is the deadline for submission of responses to the latest consultation on the CRC Energy Efficiency Scheme promoted by the DECC.

The two main points of consultation are:-

1.   A proposal to extend the introductory phase, postpone the start of phase two, and subsequent phases, and align the treatment of footprint years. The introductory phase would then run for 4 years until 2014, with registration for Phase 2 postponed until 2013 based on 2012-13 consumption.

2.   A proposal to remove the requirement for organisations who are not required to register as participants to make information disclosures. Organisations who consume less than 6,000MWh of half hourly electricity in the qualification periods would not have to participate in the scheme from Phase 2 onwards. What is not of course open for consultation is the fact that the allowances that have to be purchased by participants will no longer be recycled to participants in accordance with, and as a reward for,  their energy efficiency.  Instead, the Spending Review on 20 October 2010 announced, with no fanfair and buried within the detailed report, that revenues from the sale of allowances will be “used to support the public finances”. The carrot has been taken away and we are left with the stick. Not surprisingly this has led to commentators calling the allowances a stealth tax. For some organisations, this liability will be in addition to the Climate Change Levy and VAT that may already be payable on supplies of electricity, gas and solid fuels. This will add metaphorical fuel to the debate between landlords and tenants on who should bear this burden now there is no prospect of either party getting anything back in the form of recycling payments. I’m going to try and post some comments on how this might be treated in existing and new leases at a later date. For now I would just observe that what started out as a scheme designed to help make buildings more efficient, is in danger of instead being the focus of a squabble about who pays what and when.

Good Harvest or Grim Reaper?

Tenants, or their guarantors at any rate, might have initially viewed the decision in Good Harvest Partnership LLP v Centaur Services Ltd [2010] EWHC 330 (Ch) as a Good Thing. 

After all, if upheld, it meant that guarantors could not be forced to guarantee a tenant’s assignee under an AGA and the obiter comments of Mr Justice Newey also threw considerable doubt on whether the common practice of sub-guarantees (ie a guarantor guaranteeing the obligations of the outgoing tenant under an AGA) was also permissible.

The much awaited appeal of Good Harvest didn’t happen because the parties settled and we were left with a landmark first instance decision.

Now with K/S Victoria Street v House of Fraser (Stores Management)Ltd (2010)PLSCS 278 comes the first application of that Good Harvest decision. 

Although the Judge in Victoria Street said there were “difficulties with parts of the reasoning of Newey J in Good Harvest”, he felt constrained to follow the decision in it, and held that the 1995 Act prevented a parent company that had given a guarantee to one company in the group from giving a guarantee if the lease was assigned to another group company. 

Permission to appeal has been given, although some preliminary issues have to be sorted out before that can go ahead.

So what’s the problem?

Well, Victoria Street was concerned with an assignment between companies in the same group where the big holding company had guaranteed the tenant. 

Naturally in these situations the landlord will want the same holding company, essentially where the value is, to guarantee the assignee. 

Problem is, after Good Harvest, that can’t happen, even if the holding company wants to give the guarantee (which sounds crazy under freedom of contract principles, but there it is).

And here lies the double edged sword for tenants. 

Without the guarantee from the big cheese, landlords are not going to permit intra group assignments, unless the assignee can offer a different guarantor of comparable strength or some other form of valuable security. Where the original guarantor is the ultimate parent company, that might prove to be impossible. 

Landlords will still be obliged to act reasonably, but as things currently stand Good Harvest could end up frustrating many a company reorganisation. Not an easy one to have to explain to an exasperated CEO.