Welcome to the September 2009 issue of Bell & Scott’s Property Update.

In this month's issue we provide briefings on the Environmental Liability (Scotland) Regulations 2009 and the Carbon Reduction Commitment scheme.

We also update you on a number of other relevant news items.

Briefings

Environmental Liability (Scotland) Regulations 2009

New environmental regulations apply in Scotland from 24 June 2009 following the introduction of the Environmental Liability (Scotland) Regulations 2009. Scotland, like the rest of the UK and other EU member states, needs to comply with the Environmental Liability Directive and the new Scottish regulations fulfil that obligation. The changes will impact on developers, landowners, contractors and professionals in the property sector.

What do the regulations seek to cover?

The regulations cover “significant” damage (or the threat of “significant” damage) to:-

1. protected species;
2. natural habitats;
3. water; or
4. land.

Only damage caused by an “activity” is caught by the new rules. However, “activity” covers anything done in the course of a business, whether by a private entity or public body. All commercial enterprises, including not-for-profit undertakings, are covered. Non-commercial activities are not.

Who is covered by the regulations?

The regulations impose obligations on “operators” of commercial activities. This will almost certainly include the owner or occupier of a site but it may also include any contractor employed to carry out work on a site or a professional engaged on a project in a supervisory capacity. There is strict (no need to prove fault) liability imposed for certain types of activity including waste management operations, surface water or ground water discharges and the manufacture, use or storage of dangerous substances (most of these activities are those which are already regulated and require environmental licences or permissions). Normal economic activities which do not fall into the specified types are only caught by the regulations if they cause damage to protected species or natural habitats - not water or land - and only then if the damage has been caused by the fault or negligence of the operator.

Key requirements

The key requirements of the regulations are prevention, notification and remediation:-

• if there is an imminent threat of environmental damage, an operator must take necessary preventive measures;
• if the threat remains, following preventative measures, the operator must notify the relevant authority; and
• where environmental damage has occurred, the operator must notify the relevant authority and take all practicable steps to “control, contain, remove or otherwise manage” any contaminants. Where remediation is required, the operator needs to get approval from the authorities and then carry out the remediation in the approved way.

The relevant authorities in Scotland are (i) Scottish Natural Heritage for protected species or natural habitats other than the territorial sea, (ii) SEPA for land and in-land waters; and (iii) the Scottish Ministers for the territorial sea.

Failure to comply?

The regulations impose criminal sanctions on those who breach them. This could include the directors and managers of operators in some circumstances.

The regulations also introduce a degree of third party involvement - any person affected or likely to be affected by environmental damage or who otherwise has an interest may report matters to the authorities.

What is good news for the sector is that the regulations are not retrospective – any damage which occurred before the regulations came into force is not covered. However, existing environmental laws may cover the situation in any event.

Richard Hart, Associate and environmental law specialist, comments:-

These are significant new regulations which will have widespread impact in the property sector. All developers, landowners, contractors and professionals in Scotland should consider the potential effect that they may have on their day to day operations and procedures. Failure to address environmental issues when working on land or when acquiring a site can prove to be very costly in the long run. The public are becoming ever more aware of environmental issues, particularly when stories such as the fall-out from Corby Borough Council’s clean up of the Corby Steel Works' site become front page news.

For developers and contractors, in particular, the arrival of the regulations serves as a timely reminder that thorough environmental due diligence on a site is of paramount importance. Sound knowledge of a site’s ground conditions at the outset of an acquisition or project will allow the issue of any environmental liabilities to be addressed in any contract terms eventually agreed.

The aim of the regulations is not to replace existing law in the area but, rather, to work hand in hand with other environmental legislation. The fact that the regulations are not retrospective means that any existing damage will need to be addressed under other controls such as the contaminated land regime. Also, as the regulations only cover “significant” damage, they are likely to be used principally for more serious events.

What is novel about these new regulations is the right for people who are affected or are likely to be affected by environmental damage or who otherwise have an interest to report matters to the authorities – again all the more reason to carry out detailed environmental due diligence. This is a fairly significant development and one that is unusual in environmental regulation. Also of note is the fact that the regulations impose a preventive obligation i.e. to take steps to prevent the damage occurring – most environmental regulation deals only with the position after the damage has occurred.

The full text of the regulations can be accessed on the Office of Public Sector Information Website, accessible here.

Carbon Reduction Commitment (CRC)

If you are a large commercial user of electricity, the CRC will impact on your business from 1 April 2010. Volume affordable housing providers, hotel operators, pub groups, shopping centre owners and retailers could be the landlords or tenants of bodies that will be covered by CRC scheme and need to consider how this could affect their position.

Even if you do not qualify for the first phase of the CRC, it is clear that it will be rolled out to smaller scale energy users in the years to come and, indeed, many occupiers of buildings owned by large organisations will feel the impact of the CRC in their lease terms in the future - now is the time to consider and prepare.

What is the CRC?

The UK Government is committed to reducing greenhouse gas emissions by at least 34 per cent by 2020 and by a total of 80 per cent by 2050. Indeed, recent research indicates that the 2050 target needs to be in the region of 90 per cent if there is to be growth in the air travel industry. In the drive to meet those ambitious targets across Europe, mandatory emissions trading schemes are thought to be the most effective tools – the “carrot and stick“ approach to reducing energy consumption. The UK has selected the CRC as its weapon of choice. It is a “cap and trade scheme” in which the Government will auction a limited number of allowances - each representing the right for an organisation to emit one tonne of carbon dioxide. Organisations covered by the CRC will then need to buy enough allowances to cover the amount of carbon dioxide their buildings and other activities have emitted - calculated by reference to the amount of overall energy the organisation uses. In the three year introductory phase the price will be £12 per allowance. At the end of the set trading period, organisations that have emitted more than the number of allowances that they hold will have to buy more allowances from other organisations that have emitted less than they expected. Financial penalties apply if an organisation does not have enough allowances at the end of a trading period. The regulator in charge of the CRC will also be publishing a performance league table, which will essentially name and shame the worst performers. Those who perform well in the league table will get back some of the money they have spent in buying allowances. The objective of the scheme is to stimulate organisations to reduce their energy consumption (and therefore reduce emissions), rather than help fill the black hole in HM Treasury’s coffers.

Who runs it?

In Scotland, the CRC will be administered and regulated by SEPA but the overall lead for the UK will be taken by the Environment Agency.

Who has to take part?

The CRC will apply to any private or public sector organisation that has “a half-hourly meter settled on the half-hourly market” and which had electricity usage in 2008 of at least 6,000 MWh (megawatt hours) - equivalent to an annual bill of about £500,000. In the property sector, buildings with an electrical demand of over 100 kilowatts will probably have a half hourly utility or peak demand meter which automatically records how many kilowatt hours are used every thirty minutes. Newer commercial buildings will probably have sub-meters installed which carry out much the same function.

Heavy industrial, energy-intensive organisations will already be covered by the EU Emissions Trading Scheme and so are not covered by the CRC.

Whether a company or organisation needs to be part of the first stage of the scheme is assessed on the basis of its electricity consumption in the year 2008. However, once an organisation qualifies, it must report on and purchase or surrender allowances irrespective of its total energy consumption going forward. Subsidiary organisations or 'group members' and their parents will be grouped together for the purpose of the scheme under the highest using parent organisation. To establish a parent-subsidiary relationship the rules within section 1162 of the Companies Act 2006 will be used so that a parent organisation is one that holds the majority of the voting rights in the undertaking; or is a member of the undertaking and has the right to appoint or remove a majority of its board of directors; or has the right to exercise a dominant influence in the undertaking; or is a member of the undertaking and controls the majority of the voting rights.

If tenants of buildings pay energy bills direct to the supplier, this energy counts towards the total energy use of the individual tenants - or the highest UK parent organisation of the individual tenant. If the landlord pays energy bills on behalf of tenants for providing common services in a building (lifts, lighting, heating and air conditioning in common parts) as would be the case in a shopping centre or a multi-let office building, this energy counts towards the total energy usage of the landlord - or the highest using UK parent organisation for the landlord. Where an organisation both owns buildings in which it runs its business and occupies others as a tenant, that organisation will need to add up the energy usage in both types of tenure. For the purposes of the CRC, where the landlord has an electricity supply contract, it is immaterial whether that energy is used by the landlord for its own business, by the landlord within the common parts of a leased building or by the landlord to supply on to tenants for use within the tenants’ premises. Clearly, landlords of shopping centres and occupiers will need to consider the CRC in negotiating new leases. As for leases which are already in place before the CRC kicks in, it is not entirely clear whether or not a tenant’s obligation to pay all outgoings and taxes for a property or a requirement to comply with all statutory obligations would cover the CRC liability – readers should seek advice on any specific lease wording.

Timetable for implementation

The scheme is divided into phases, with an introductory three-year phase begining in April 2010. Subsequent phases will each last five years. Each phase will contain a qualification period – this will be the year preceding the 'footprint year' and will start with the year 2008 during which organisations must determine whether they are to be participants. The “footprint year” is the first compliance year of each phase for which a participant needs to work out its total energy usage and determine its emissions responsibility. The registration deadline will be the last working day of the “footprint year” i.e. 31 March. Registration for the introductory phase will take place between 1 April and 30 September 2010.

What if you do not want to play?

Failure to register for the scheme carries a fine of £5,000 plus a daily penalty of £500 per day and failure to provide a “footprint report” or to provide an annual report will carry a fine of £5,000 plus a penalty of £0.05 per day of CO₂ unreported, with penalty increases if over 40 days late.

The British Property Federation has published a guide for landlords and tenants which aims to assist owners and occupiers of commercial property with the implementation of the CRC.  

Details are available on the British Property Federation website accessible here

SEPA have also published a list of Frequently Asked Questions on CRC accessible here

News Updates