Is the Green Deal a great deal?

29 January 2013

There is no denying the Green Deal has many advantages but consider the deal in relation to short term leases and it may not be as great as it initially seems.

The Green Deal is a government introduced funding programme which began yesterday and allows energy efficiency improvements to be installed on a property by the owners or occupiers at no up-front cost.  Payments are made at a later date in instalments alongside energy bills by the person responsible for payment of energy bills for the property. For an improvement to be eligible for finance under the Green Deal it must meet the "golden rule", that is the expected financial savings resulting from installing improvements must be equal to, or greater than, the cost of repayment over the term of the Green Deal plan. 

The advantages seem obvious: 'buy now pay later' improvements, lower energy bills, lower carbon-footprint and an energy efficient property potentially worth more on re-sale.  However, the Green Deal is a long term measure: consider the impact for short term leases and this paints a less attractive picture.

In fact, there is little benefit to short term tenants. The "golden rule" ensures that most financially viable Green Deal plans will last longer than the average short term tenancy. So, the tenant effectively pays for energy saving improvements to the landlord's property but will not be in occupation long enough to reap the long term benefits. Whilst these improvements will result in lower energy bills, during the Green Deal plan these savings will be eaten up by the Green Deal instalments the tenant is responsible for paying.  A short term tenant is unlikely to be in occupation beyond the Green Deal plan period so will never benefit from paying lower energy bills minus instalments.  On top of this, the tenant will be disrupted by the installation of the improvements and as a short term lease is likely to have more restrictions on disposal, the tenant won't profit from the property being more energy efficient when it sells its interest.

You may think the picture is more rosy for the landlord. However, as the Green Deal plan is likely to be longer than the lease, the landlord will have to pay the energy bills during void periods. This would not be much of an issue pre-Green Deal as these energy bills would be exceptionally low given the property would be unoccupied. Green Deal payments, however, are still payable regardless. Further, the Green Deal could affect property marketability and as a result the landlord may find letting the property increasingly difficult as prospective tenants become wise to the issues surrounding the Green Deal.  Might this be a ground for refusal of consent for alterations?

It remains to be seen how the Green Deal will be implemented and the effects it will have on leasehold properties. However, with the average commercial lease length dropping to less than five years, it is likely a huge number of landlords and tenants might actually be adversely affected by this seemingly beneficial programme.


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