Major property players have largely welcomed new mandatory disclosure information regarding energy consumption upon sale or lease.
Industry experts believe tenants stand to gain the most from the legislation, which came into effect from November 1, 2010, as it pushes the onus back onto landlords and owners to meet sustainability requirements.
Under the legislation, owners and lessors of commercial property space, with an area of 2000sqm or more, are required to disclose energy efficiency information to prospective buyers or tenants during sales, leasing or subleasing negotiations.
The regulations, which currently only apply to office space transactions, require a National Australian Built Environment Rating System (NABERS) energy base or whole building rating until October 2011.
From November 2011, a Building Energy Efficiency Certificate (BEEC), which includes a NABERS energy base building rating, tenancy lighting information and generic energy efficiency guidance, will need to be disclosed.
While there is a cost associated with complying with the new regulations, not complying will be more expensive. Those who fail to comply face a $110,000 fine on the first day and $11,000 per day thereafter.
ING Real Estate sustainability manager Andrew Cattanach says he supports the intention of the legislation, but describes the implementation as “incredibly cumbersome”.
“It is trying to do things which really aren’t required and, in terms of its operation, it is becoming a real nightmare for the industry,” he says.
“If someone wants to buy your building you can’t even consider it unless you have the regulations in place. It is a legal minefield at the moment. It is another layer of duplication over complication.”
Knight Frank head of sustainability Jon-Paul Mather, who is also an assessor, supports the legislation’s intent but believes it carries a number of “kinks”.
“They’ve taken a piece of legislation that is quite onerous in terms of penalties and linked it with something that was voluntary. There are some flaws in that,” he says.
“In the long term, the tenants will be the winners. The other winners will be those owners who have been engaging in sustainability of their buildings over a long period of time ... Their portfolios are going to stand out. There is no doubt that some of the smaller owners have struggled to come to grips with complying with the legislation who have found it more difficult and painful.”
Property Beyond director Rodney Timm suggests the legislation will affect existing or prospective tenants differently to those tenants with excess space to sublease.
“As a prospective tenant they will pay a market rental not a premium because environmental performance is expected,” he says.
“Unless the tenant is a trophy tenant looking for a trophy building, the environmental performance does not have to be six-star – 4.5-star or five-star is good enough if that is the industry benchmark for the grade of the building.
“Mandatory disclosure is an evolution for the market and great for tenants seeking new premises. Transparency is a good thing for the customer in the market and in a complex asset like buildings any transparency and honesty is going to be good.”
But Timms warns existing tenants wishing to sublease some of their excess space will “probably get a bit of a shock” when trying to list with an agent.
“Subleasing is always difficult because landlords do not have any inclination to assist in the process so this will just make it more complex,” he says.
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The lawyer's view
An industry lawyer has welcomed the legislation’s environmental intent, but has condemned its penalty regime as “draconian” and its far-reaching effects on buildings beyond traditional office space as complex.
Norton Rose partner Lexia Wilson, who also sits on the Property Council’s NSW Sustainability Committee, says she applauds the philosophy of the new law but disagrees with its execution.
“There is a clause in there where assessors could go to jail, which is ridiculous,” she says.
“It is also affecting buildings which are not Class 5 buildings, so it is capturing those which were never intended to be captured, like private hospitals and warehouses.
“The government at the last minute chose not to use the Class 5 definition and instead they created their own unique definition of an office building.”
Wilson says under the government definition, net lettable area applies to anything concerning “administration, clerical, professional or similar information-based activities”, which has far reaching effects beyond traditional office space.
The move has forced those outside of the office space to “scramble to meet compliance”, Wilson claims.
“The government has issued guidance notes saying the impact was not intended, but guidance notes don’t have force of law,” she says. “This gives right to other parties such as purchasers to demand a building energy certificate which could trigger court action and they are not bound by guidance notes.
“There is a similar potential with tenants. At the moment, everyone is in catch-up mode to fully understand the impact of this legislation.”
Wilson believes the first area to attract legal action will be exemption applications, claiming owners face up to 14 months wait for compliance under the new legislation.
Financiers will also start demanding NABERS ratings for the life of the loan, which will impact on building owners in an already strained post-GFC climate, she says.
“The government should have brought this legislation in and suspended penalties for six months. Don’t hit people with heavy fines and jail,” she says.
The industry's view
Responding to criticism about the implementation of mandatory disclosure regulation, in November the Federal Government acted to re-assert control over its Department of Climate Change and Energy Efficiency (DCCEE), a move welcomed by the Property Council of Australia.
In order to avoid another botched implementation program, following the embarrassing Green Loans and ‘pink batts’ fiascos, the Federal Government instructed DCCEE to improve its management of the mandatory disclosure regime for office buildings.
The Minister for Climate Change and Energy Efficiency Greg Combet and his Parliamentary Secretary Mark Dreyfus have responded to industry concerns by directing the department to properly consult with stakeholders and refrain from penalising property owners until grey areas around mandatory disclosure rules are clear.
“Greg Combet and Mark Dreyfus have done a great job of listening to genuine industry concerns”, says Peter Verwer, chief executive of the Property Council of Australia.
“Property investors support disclosure of environmental performance, we support the NABERS environmental measurement tool and we are committed to strong industry leadership on these issues.
“However the Department refuses to heed the real world advice of industry practitioners and has turned a very simple, straightforward scheme into a shemozzle.”
The Property Council and its members have provided the Department with multiple examples of implementation problems along with practical solutions, most of which have been ignored.
“We welcome the establishment of a consultative committee, to be called the Commercial Building Disclosure Scheme Implementation Forum,” Verwer says. “It’s a great pity this committee did not meet until the last day of business before the legislation kicked off and six years after we first proposed it.”
Verwer says the new implementation committee should be led by an independent chair rather than the Department.
“We’re perplexed by the Department’s refusal to adopt modern governance principles of transparency and independence.
“Nevertheless, the committee is a step in the right direction as it will help clarify a growing list of implementation grey areas in a regime that carries penalties of $110,000.
“We’ll watch closely to ensure the Department doesn’t penalise the industry before it clarifies its own rules and releases plain English compliance guidelines.
“Despite all these issues, the Property Council supports the mandatory disclosure scheme based on the guarantees provided by the Government.
“Our greatest hope is that the Department will learn to value proper consultation.
“Given that mandatory disclosure is slated to extend to shopping centres, hotels, schools, hospitals and houses in the near future, it is critical the Department gets it right next time.
“When it comes to people’s homes, any repeat of the mistakes that plague the office scheme will result in a severe backlash.”