In the light of new rules on hydrochlorofluorocarbons (HCFCs) the next time the building's air conditioning system breaks down FMs will have much to consider, says Linda Fletcher
29 January 2015
From 1 January it has been illegal to use recycled or reclaimed hydrochlorofluorocarbons (HCFCs), which include the ozone-depleting refrigerant gas R22, to maintain existing refrigeration, heat pump and air conditioning (RAC) systems.
R22 is common in pre-2004 RAC systems and so its ban will have a big effect on air-conditioning and refrigeration costs. HCFCs have not been legal for use in new RAC equipment since 2004. In 2010 a ban was imposed on the use of 'virgin' HCFCs to maintain existing RAC equipment. Since then, only recycled HCFCs obtained from decommissioned RAC equipment or reclaimed HCFCs can be used to maintain existing systems.
Now RAC systems can no longer be maintained or serviced, including any topping up of the systems, with any HCFCs. So when RAC systems using HCFCs break down or need servicing or topping up, FMs must consider:
- Replacing the system with new RAC equipment that uses a different, permitted non-ozone depleting substance; and
- Converting the existing system so it can use a non-ozone depleting substance. This will involve having to replace parts of the current RAC system.
Several factors influence the cost-benefit analysis, including:
- The age of the RAC system;
- The efficiency of the system;
- Leakage problems;
- Compatibililty of alternative non-ozone depleting substances;
- Efficiency and availability of non-ozone depleting systems; and
- Equipment manufacturers' advice about using modern non-ozone depleting substance.
Some manufacturers say using modern non-ozone depleting substances in converted RAC systems means poorer performance and higher energy costs - something owners, tenants and FMs will want to avoid given laws such as the Carbon Reduction Commitment Energy Efficiency Scheme and the proposed laws on Minimum Energy Efficiency Standards (under the Energy Act 2011).
The proposed Minimum Energy Efficiency Standards will be published soon, making it unlawful in England and Wales to let properties with an EPC rating of 'F' or 'G' after April 2018 without making energy efficiency improvements. It will also be unlawful to let those properties (i.e. for a lease to continue if granted before April 2018) from April 2023. Works to improve the EPC rating may include replacing inefficient RAC systems.
In addition to banning the use of HCFCs there are also prohibitions on using certain fluorinated greenhouse gases (F-gases), the most important of which are hydrofluorocarbons (HFCs). F-gases are also used in many RAC systems. This law regulates the reduction of emissions of F-gases (mainly through better containment). A new 2014 EU regulation limits the amount of F-gases that can be sold as it:
- Introduces a phase-down measure to cut F-gas emissions by two-thirds by 2030, mainly by phasing out HFCs; and
- Bans use of F-gases in most new equipment and ensures leakage checks and recovery of F-gases used in existing equipment.
Property owners, occupiers, FMs and RAC maintenance contractors must also comply.
Issues for FMs
Who will pay for these changes? This will depend on the wording of the lease. Service charge schedules, repair clauses and statutory compliance clauses will be particularly relevant.
In a multi-let building the service charge provisions will determine if the costs of dealing with the prohibition can be recovered by the landlord from its tenants. Review whether the provisions allow for the costs of repair, improvement and/or replacement of any RAC system can be charged to the tenants.
What constitutes repair, improvement or replacement is not always clear. If the RAC equipment still functions, although not in the most energy-efficient way, does that mean it is in disrepair? The RICS Code for Service Charges in Commercial Property (Third Edition) has advice on how to distinguish between the costs of repair, improvement and replacement when deciding whether to charge costs to the service charge. Service charge costs should not generally include the cost of improvements beyond repair, maintenance or replacement.
For current tenants it may be that those responsible for repair, improvement or replacement of RAC equipment will factor that responsibility into their decision on whether to exercise a break option. They will wish to review the existing terms of their leases on repair and service charges. The issue could also be significant to discussions about dilapidations at the expiry of a lease. How the ban will affect rent reviews remains to be seen; a split market could emerge with greater rents being obtainable for premises with new or converted RAC systems.
For prospective tenants, including those renewing a lease, carrying out due diligence will include checking whether the RAC systems use HCFCs or F-gases. Repair obligations and the extent of the service charge will be relevant to discussions at the start of a lease, with new tenants likely to try to negotiate the exclusion of such costs from these clauses and/or requiring a cap on service charge liability. Tenants may also demand that such equipment be replaced or converted before the lease starts.
Pre-lease surveys are vital; FMs will need to take account of the status of the RAC systems and potential costs relating to these. They should plan for the upgrade of older RAC, and establish who is going to be responsible for the costs during lease negotiations.
This article does not constitute legal advice. Specific legal advice should be taken before acting on any of the topics covered.
Linda Fletcher is a legal director at Pinsent Masons