Landlords to go halves with tenants on CO2 price

The principle under German law that consumption-based ancillary costs can be passed on by the landlord to the tenant in full is beginning to falter. On 12 May 2021, the German federal government decided that the CO2 price, a levy on carbon dioxide emission which has been in force since 1 January 2021, will be divided equally between landlords and tenants.

Since the beginning of 2021 anyone who wants to emit one tonne of carbon dioxide equivalent from certain fuels, such as heating oil or heating gas, needs an emissions certificate for this. The price for a certificate s € 25 in 2021, but will be raised annually by law. It is currently being discussed whether the increase provided for by law should be aggravated. The CO2 price will charge to the supplier, who can, however, pass it on to its customer.

Up to now, the German Operating Costs Ordinance (Betriebskostenverordnung) and the Heating Costs Ordinance (Heizkostenverordnung) have allowed the costs for the operation and consumption of heating and hot water to be passed on to the (residential) tenant. Consequently rising prices for fuel were fully borne by tenants in recent years, regardless of the energy efficiency of the building occupied. The same applied for the CO2 price introduced on 1 January 2021 under the Fuel Emissions Trading Act.

The decision of the Federal Constitutional Court in its ruling of 24 March 2021 which declared the German Climate Protection Act (Klimaschutzgesetz) unconstitutional, however, has reignited a discussion that has been ongoing already as to whether the CO2 price should be borne partly by the landlord, and if so, to what extent. One of the arguments in favour of landlord´s participation was that it is the landlord, not the tenant, who is responsible for the energy efficiency the leased property.

As a result of this discussion, the Federal Ministry for the Environment (Bundesumweltministerium) reported on 12 May 2021 that the German federal government had decided within the framework of the "Climate Pact" to split the costs of the CO2 price equally between landlord and tenant. The details of the implementation of this principle remain to be seen.

Against the background of the government decision, the (high) energy efficiency of a building is now not only a (soft) competitive advantage over other landlords, but is increasingly in every landlord's own monetary interest. For attracting funds for real estate investments, "green" features of the property (for example according to the Taxonomy Ordinance) are already decisive criteria today. Now they are also becoming increasingly relevant for cash flow calculations in the ongoing asset management.

The parties to lease agreement will also have a new topic to discuss in contractual negotiations. Both the (heating) behaviour of the tenant and the energy efficiency of the building are decisive for the consumption of fuels and the corresponding costs (CO2 price), which both parties must now bear equally. In lease negotiations, it will have to be stipulated if and to what extent the tenant is contractually obliged to save energy (in terms of heating) and what the legal consequences of violations of the corresponding provisions are. This topic has been discussed for many years in Germany already under the label of "green leases", but has hardly ever been implemented in lease agreements to date. Regarding the landlord´s side, it is to be expected that tenants will increasingly raise their demands on the energy efficiency of lease objects in order to save costs.

It remains to be seen what the consequences of the draft law will be for existing tenancy agreements. This will inter alia depend on the exact wording of the new law, on whether the Operating Costs Ordinance is amended in the course of the introduction of the new legislation and last but not least the provisions of the specific tenancy agreement.