Net Zero is going to be difficult throughout the world … but with leasehold tenure, next to impossible

How do you impose the sheer expense of carbon neutral enhancements to a block of flats to meet Net Zero targets?
Under the leases these works would be an improvement – which is not what leaseholders have signed up for when they purchased their properties with legal advice.
Secondly, who really thinks our “responsible long-term custodian” offshore investor – who has picked up resi freeholds because he loves the legally enforceable income streams that he sees in apartment blocks in England and Wales – is going to do anything at all to the building unless there’s some money in it?
This was a concern expressed at the meeting by Sheema Malhotra, Labour MP for Feltham and Heston, that costs would be imposed on leaseholders.
These would have been the major talking point in the leasehold world at present – were it not for the tragedy of Grenfell. So we are spending a fortune remediating blocks of flats, but to make them safe rather than to meet carbon neutral targets.
The meeting was also addressed by author Ross Clark, whose new book Not Zero challenges the entire consensus in government over meeting net zero targets, which he believes would be ruinous even if based on reality.

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By Evan McKenzie
Political Science Department and Law Faculty
University of Illinois at Chicago

It is difficult to obtain accurate data on US condominiums and homeowners associations, because governments are not keeping track of them and therefore the best sources of information are trade associations.

There are about 360,000 common interest communities in the US, housing, almost a ten-fold increase since 1980, with 28 million housing units (20% of US housing stock) and 75 million residents (22% of the population).

Of these associations, 35-40%, or between 125,000 and 143,000, are condominium associations.

The leading states are California, Texas, New York and Florida, which has 1,529,764 condominium units operated by 27,588 condominium associations, out of a total of almost 50,000 common interest communities.

There is little available data on the state of condo association finances, but everything we have points to the fact that many, if not most, condo associations already have too little in their reserve accounts to pay for inevitable repairs and replacements of major building components.

They are even less prepared to pay for unanticipated expenses, and much less so to pay for retrofitting their buildings to comply with new building standards related to building safety, adaptation to environmental conditions (fire, sea level rise, flooding) or net zero policy benchmarks.

Even worse, they don’t know how much they need to put in reserves.

Net Zero and Condominiums: Emerging US Policies and Practices

On December 8, 2021, US President Joe Biden signed Executive Order 14057, announcing that the federal government would lead the nation to net zero greenhouse gas emissions by 2050. He also re-committed the US to the Paris Agreement and signed the Inflation Reduction Act of 2022, which included a historic commitment of $391 billion to address climate change.

Until Florida passed a new law a few months ago, only nine states required, or even encouraged, community associations to have regular reserve studies [to establish needed capital expenditure projects]: California, Colorado, Delaware, Hawaii, Nevada, Oregon, Utah, Virginia, and Washington.

Only Delaware required them to be done. Now Florida requires a “structural integrity reserves study.”

Their sources of funding are:
1) Monthly assessments
i) Operating expenses
ii) Contribution to reserves
2) Special assessments
i) Emergency expenses
(a) Capital expenditures
(b) Lawsuits—legal fees and judgments (breach of contract; intentional tort; other uninsured losses)
(i) Suit by unit owners
1. Breach of fiduciary duty
2. Negligence
3. Negligent or intentional infliction of emotional distress
4. Breach of contract
3) Insurance
i) Sudden and accidental losses
(a) First party—to the property
(b) Third party—to others injured on or by the property
ii) Note that wear and tear is not a covered peril—ever
iii) May require litigation and legal fees to recover
4) Lawsuit judgments in their favor
i) Construction defect—against developer and other professionals
(1) Strict liability in tort
(2) Negligence
(3) Breach of implied warranty of habitability
(4) Breach of express warranty

The condominium housing stock is aging. In Florida, almost 60% of the condominium units are in buildings that are over 30 years old, housing 2 million people (21 million in the state). (28,000 condo associations with 1.6 million units)

Units	Age/years	per cent
105,404	over 50	6.9%
479,435	40 to 50	31.3%
327,537	30 to 40	21.4%
141,773	20 to 30	9.3%
428,657	10 to 20	28.0%
46,958	under 10	3.1%
1,529,764		100%

It is important to understand that in the US, national policy can change dramatically every four years because the two national parties are evenly balanced and bitterly polarized on environmental policy.

President Obama: Clean Power Plan (struck down by USSC in 2022, W. Va. vs. EPA); 2014 China agreement, 2015 Paris agreement.

President Trump: global warming a “hoax”; US energy independence through fossil fuels; rollback of 112 environmental regulations, oil drilling in national parks and almost all US waters; pulled US out of Paris agreement.

President Biden: 97 environmental policies enacted or proposed; rejoined Paris agreement; host environmental summit; 2021 UN Climate Change Conference; net zero/carbon neutrality by 2050; Inflation Reduction Act of 2022 contains $391 billion to address climate change is projected to reduce 2030 U.S. greenhouse gas emissions to 40% below 2005 levels.

“The bill aims to decrease residential energy costs by focusing on improvements to home energy efficiency. Measures include $9 billion in home energy rebate programs that focus on improving access to energy efficient technologies, and 10 years of consumer tax credits for the use of heat pumps, rooftop solar, and high-efficiency electric heating, ventilation, air conditioning and water heating.
“The bill extends the $7,500 tax credit for the purchase of new electric vehicles while also providing a $4,000 tax credit toward the purchase of used electric vehicles, in an effort to increase low- and middle-income access to this technology.[69] This is projected to lead to an average of $500 in savings on energy spending for every family that receives the maximal benefit of these incentives.[70] The bill includes a 30% tax credit ($1,200 to $2,000 per year) and different types of rebates (reaching $14,000) for homeowners who will increase the energy efficiency of their house.”

Types of policies re condos and environmental policies, in order of intrusiveness into association affairs and decision-making:
• Goal setting; targets; Voluntary compliance by associations
◦ US federal government; Executive Order 14057, 8 December 2021

▪ carbon pollution-free electricity sector by 2035 and net-zero emissions economy-wide by no later than 2050—all related to federal buildings, property, and vehicles

▪ “Fannie Mae is one of the world’s largest issuer of green bonds – fixed income products that enable positive environmental, social, and economic outcomes. Our Green Bonds are Mortgage-Backed Securities (MBS) collateralized by loans that finance energy- and water-efficient homes and properties. In 2019, we celebrated 10 years of Multifamily Green Financing, and in 2020, we expanded our offerings to include Single-Family Green Bonds. Through December 2021, we have issued $101 billion in Multifamily Green MBS and approximately $13.4 billion in Green re-securitizations, and $607 million in Single-Family Green MBS… At Fannie Mae, our mission is clear: to deliver stability and affordability to America’s housing market. We do so primarily by purchasing mortgage loans from lenders and securitizing them into mortgage-backed securities (MBS), which we then guarantee. Our green efforts support the Single-Family and Multifamily housing markets by financing homes and rental communities that meet energy- and water-saving standards. We offer investors green bonds that build upon our mission where the underlying collateral positively impacts housing infrastructure and the environment.”

▪ ESG: Environmental, Social, and Governmental strategy

    ◦ many states; some cities
    ◦ Fannie Mae—issues 
    ◦ cost savings; recognition
• Removing private barriers to change
    ◦ private covenants requiring lawns; prescribing building materials; associations banning or denying permits for solar panels; wind power
    ◦ Mostly a problem in western states—CA, AZ, NV
    ◦ Easily fixed by state legislation
• Mandatory benchmarking, annual reporting, and publicizing 
    ◦ Chicago 2013
    ◦ NYC
    ◦ Many other cities… Boulder, CO; Reno, NV; Wash, DC; Washington State and city of Seattle; St. Louis, MO; Boston and Cambridge, MA; Montgomery County, MD
• Mandatory progress toward net zero
    ◦ New York City

The Climate Mobilization Act was passed in April 2019 by the New York City Council. It contains 11 different laws. It involves mandatory benchmarking for energy use and an energy efficiency score, including potentially costly fines for non-compliance and criminal penalties for false reporting.
It applies to all buildings with over 25,00 sq ft, including a majority of NYC condos, cooperatives, and rental buildings. They must reduce emissions by 40% by 2030 and 80% by 2050. Some buildings must get below allowable limits by 12/31/2024. Annual reporting starts in 2025, with first reports by design professional due 5/1/2025 and every year thereafter.

Components:

Carbon study and energy audit of onsite and offsite energy use; GHG budget for each building; posting of scores; annual reporting; green roofs and/or solar panels for all new buildings and roof renovations; carbon emissions caps for all buildings; loan program (Property Assessed Clean Energy Loans –PACE-third party loans from banks–but condos are not eligible for them); also state agency working on the energy sources with utilities and seeking federal grants
• Financial incentives and supports
◦ New York City; condominiums not eligible for PACE loans
◦ Typical condo bank loan criteria
◦ Inflation Reduction Act funds when they become available—condos and co-ops are eligible.

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Commonhold would make the Net Zero task much simpler, as we in Australia have found with strata title

By Michael Teys, of Strata Research and Training

Low Carbon Net Zero Homes
APPG Leasehold and Commonhold Reform
Palace of Westminster, 6 February 2023
Main points

Ageing strata buildings in Australia are being renewed and retrofitted to reduce carbon emissions financed by owner contributions (levies), strata loans, and selling airspace development rights.

Strata laws have been amended in Australia to assist owners renewing buildings, financing sustainability infrastructure, and to enforce statutory repair and maintenance obligations.

The Law Commission proposals to reinvigorate commonhold in England and Wales should make it easier for banks to fund retrofitting of sustainability infrastructure at affordable rates if they can be satisfied about the priority of securities and community association solvency.

Context

1. Commonhold in Australia is called strata. We have had strata for 60 years. We have over 340,000 strata schemes comprising more than 2.8 million units. The insured replacement value is more than one trillion dollars (Easthope,
   Thompson and Sisson 2020). Nearly half of Australia’s occupied apartments are
   in New South Wales (47 %) (Australian Bureau of Statistics 2017). In the City of Sydney, 80% of its residents currently live in units – 15 times more than the national average (NABERS 2020).
2. Compact city planning has been the prevailing orthodoxy of urban design policy in each of the major Australian cities since the mid 1990’s advocating high- density mixed-use developments and urban renewal (Grodach and Limb 2020; Bunker et al 2017; Crommelin et al 2017). Strata title is the key mechanism to deliver medium density and high-density development (Troy et al 2015; Dredge and Coiacetto 2011). Randolph (2006) notes densification only took on a higher profile after strata legislation was introduced in the 1960s. Since 2016 strata developments have been the majority for new housing approvals in Australia (ABS 2016). In Sydney strata apartments are presently more than 65 % of all new housing approvals (ABS 2016).
3. 35 % of Sydney’s commonhold housing stock is more than 35 years old (OCN
   2022). The NSW State Government has identified the growing issue of strata
   dilapidation and the pressure to increase housing supply as significant, and
   interlinked policy concerns (Troy et al. 2015; Easthope and Randolph 2021).
4. Buildings are responsible for 50% of electricity use in Australia and represent 25% of national emissions. Up to 60% of energy consumption in large
   apartment buildings come from common areas and shared services. Around 25
   % of shared costs are spent on utilities alone (NABERS 2020).
5. Australia is committed to be net zero carbon emissions by 2050, with an
   interim 2030 target of 42% less carbon than 2005. NSW has a faster target to
   cut carbon emissions by 50% by 2030. To help drive these targets renewable
   electricity generation and transmission is being built with the federal
   government committed to ensuring 82% of electricity will be from renewable
   sources by 2030.

First Point – Ageing strata schemes are being renewed and retrofitted by owner corporations financed by owner levies, strata loans, and selling airspace redevelopment rights.

6. Evidence of renewal and retrofitting for sustainability infrastructure is limited. A not for profit, Green Strata (Christine Byrne) pioneered support for owners corporations in this field from 2010. In recent years ‘fee for service’ consultancies and local authority funded programs have taken on this work and provide case studies of savings for ageing strata, for example WattBlock; NABERS; Green Star; Smart Green Apartments; Building Futures .
7. Apart from government rebates and assistance, there are three methods by
   which owner corporations are funding sustainability retrofits: levy
   contributions, strata loans, and the sale of airspace redevelopment rights.

The simplest and most common method of financing retrofitted sustainability infrastructure is by levying owners in accordance with their proportional shares in the scheme.

Strata loans in Australia have been offered in Australia for more than 15 years. They are used for building defect remediation, refurbishment, retrofitting sustainable infrastructure, and redevelopments.

The market is however relatively small, circa A$500 million. Strata loans are not available from mainstream banks.

Owner corporations in Australia are precluded from granting a mortgage or charge over common property. Consequently, rates are high and are currently just over 10 % pa.

Historically, strata loan interest rates have run at about 5 % higher than variable home loan interest rates. Strata loans are available for terms of up to 10 years. strata loans are being used to remove and replace combustible cladding.

In some cases, the NSW state government is paying the strata loan interest for an eligible owners corporation.

Owner corporations borrow money on this basis where not all members can afford the increase in levies to pay for the infrastructure. In Australia levies cannot be assessed differentially so there is no option for some owners to pay their share of a contribution up front with other owners taking a finance option via a facility organised by the owner corporation.

Loans are made on the security of the owner corporations’ statutory obligation to raise contributions to meet its debts. There are three reasons why loans are made in Australia on this basis-

• the law precludes winding up of owner corporations in Australia until,
  among other things, all the debts of the owner corporation are paid,
• owner corporations in Australia are unlimited liability entities where
  owners jointly and severally guarantee the debts of the owner
  corporation and a judgement creditor has a statutory right to appoint
  an administrator to assess and collect contributions until the
  judgement debt is paid.
• levies run with the freehold unit title so new owners become jointly
  and severally liable for levies that are outstanding on the date they
  become a member of the owner corporation.8. There is an emerging market for the sale of airspace development rights by owners corporations where the proceeds of sale are being used by to fund retrofitting of sustainability infrastructure. See, for example Byairspace and ARAD.

Second Point – Legislation in Australia has been amended to assist owners renewing buildings, financing and installing sustainability infrastructure, and to enforce statutory repair and maintenance obligations.

9. To facilitate higher density and renewal of aging buildings the New South Wales parliament introduced law in 2015 to allow for the sale or redevelopment of buildings with a reduced threshold of 75 % owners. The legislation has been unsuccessful with only 1 scheme having used the procedure. However, between 2105 and 2019 there was an increase in unanimous terminations from 177 terminations in 2010-2014 to 308 in 2015 to 2019 which may be related to the passing of 2015 termination laws (Crommelin et al 2020).
10. To encourage retrofitting of sustainable infrastructure, legislation was passed in 2022 in New South Wales to make it easier to pass resolutions to improve common property by financing and installing sustainability infrastructure.

Now more than 50 % of those entitled to vote must vote no to defeat such a resolution. It is too early to assess the impact of this reform.

11. A draft bill is on exposure for consultation that will allow regulators to issue enforcement notices to owner corporations that have failed in their statutory duties to repair and maintain common property. The statutory duty of an owner corporation in NSW extends to fixing building defects of the original developer. Forcing effective and timely remediation work will prolong building life.

Third Point – The Law Commissions proposals to reinvigorate commonhold in England and Wales will make it easier for banks to fund retrofitting of sustainability infrastructure at affordable rates.

12. The ability of an owners corporation to raise funds for special projects such as remediation of defects and retrofitting of sustainability infrastructure is always problematic because of the diverse interests and financial circumstances of theowners. The Law Commissions proposed reforms to allow commonhold associations to borrow money and give a mortgage over common property should make it easier to attract finance for retrofitting sustainable infrastructure on terms more favourable than strata loans.
13. It is worth noting that despite strong banking and institutional support for strata in Australia, traditional Australian banks will not lend directly to an owners corporation. This might be because owners corporations can’t give mortgage security. However, there may be other issues relating to competing interest of banks with mortgages over both common property and unit titles.
14. If banks are concerned about lending to a commonhold association limited by guarantee, then steps should be taken to ensure that the mortgagees right to appoint an administrator is not defeated by a winding up application that
    triggers the owners limited guarantee protection.

References and links to referenced material will be supplied in due course.

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Net Zero will be driven by vested interests to the detriment of ordinary flat owners, says anti Net Zero author

By Ross Clark, author Not Zero

My chief concern is that this issue of retrofitting buildings is going to be driven by the vested interests who stand to make a lot of money out of this, and will be able to force us to use their services.

And not enough weight will be given to the people who will bear the cost. The leaseholders.

Setting standards of new buildings, I can get that. If you are putting up a new building it’s right to demand the very highest standards.

With retrofitting, you’re always going to be making a proverbial silk purse out of a sow’s ear.

I’d love to know more about some of the figures stated at this meeting, because a 30-year payback time is a lot less than some of the figures that I have seen.

ROSS CLARK: Gov’s fantasy of net zero will leave us poorer and colder

Bravely challenging the Establishment consensus, ROSS CLARK has written a new book arguing that hysteria and doom-mongering surrounding the climate change debate risk doing more harm than the rise in temperatures itself might ever cause. Here, in the second extract, he explains the folly of politicians’ rush to net zero .

A few years ago, I went to see a two-bedroom, two-up two-down house which Oxford Brooks University had made an early attempt at decarbonizing.

The university claimed that it had reduced the carbon emissions by 80 per cent.

It had cost £90,000 for the work. You could argue that that was a one-off cost and there in a major programme there would be economies of scale.

Nonetheless, that cost was twice the value of that sort of house in many parts of the country.

I am also particularly concerned about the way energy performance certificates are being used. This idea that by 2025 you are not going to be able to sell or rent a property unless it’s got a grade C rating seems to me to be completely absurd.

We will gum up the housing market and the rental market, and we will end up with a situation with enormous rises in rent simply because a lot of houses and flats will not allowed to be rented out.

It seems it seems to me that Energy Performance Certificats are really no better than guesswork, and I’ll give you a hard example of this.

I looked at a Victorian institution converted into flats where I found two flats: one was grade B and one was grade D.

One could be rented or sold, and the other couldn’t. And the only difference between this was that the B one had “wall insulation (assumed)” and the grade D one said “no wall insulation (assumed)”.

Same building, same energy performance, but one assumption by the surveyor had completely damned one of those flats.

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By Mark Routley, head of property litigation at TLT: Legal reform for net zero in blocks of flats zero

All Parties Parliamentary Group – Leasehold and Commonhold
Meeting on 6 February 2023 3pm
Low Carbon and Net Zero Homes
Potential Legal Reform

Leasehold property arrangements are complicated and
leases often contain terms which are a barrier to carrying out both building level improvements and at
the flat level too. At a building level the principal challenge for a freeholder is that most leases typically
require the freeholder to keep the structure of the building and the common parts and the plant and
equipment in the building in good repair and condition. However, the obligation only kicks in if the
building or plant has deteriorated. Although, this does not limit the freeholder to have to replace like
with like if the plant and machinery has not deteriorated but the freeholder wants to replace it with
more energy efficient equipment, he can’t rely on this provision as unless the lease allows it to
undertake improvements. Outside of public sector housing it is relatively unusual for a lease to allow
the freeholder to carry out improvements. In certain situations, this is advantageous to leaseholders
as it protects them from freeholders undertaking substantial building enhancement works with no
benefit to leaseholders and at their expense. However, the disadvantage is that, unless everyone
agrees (and it may not be practical to secure agreement from everyone) reasonable upgrade works
that could save leaseholders money, such as insulation, cannot be made through the normal
mechanism by which the building is kept in good repair and condition. The cost of the works could not
be included in the service charge and the freeholder would not have rights of access to flats if this
were required. If the freeholder decided to proceed anyway it could be challenged by a leaseholder in
the First Tier (Property Chamber).

Getting everyone to agree to this may be challenging. It may be even harder to secure a permanent
variation to their leases. It can be time consuming and requires the agreement of 100% of
leaseholders and any lenders and in larger buildings this may not be practical.

And for leaseholders there are also barriers. The lease may not permit any alterations at all even
perfectly reasonable improvements and the freeholder can just say no. Leaseholders may also need
access to other parts of the building or the freeholder’s own land for ancillary works something they
generally do not have a right to enter without consent.

There is no easy answer to tackling this issue but one thing we think would improve the position of
both freeholders and leaseholders would be to address these restrictions in the leases and make it
easier for freeholders and leaseholders wanting to undertake improvements to be able to do so. With
the assistance of Professor Sue Bright of Oxford University we have drafted a bill – the Leasehold
Reform (Energy Efficiency) Bill which is intended to address this problem. If enacted it would do
several things.

First it would imply into the freeholder’s repairing provisions the ability to undertake “qualifying
improvements”. These are improvements that would improve the EPC rating of a flat or flats to say a
C or a D, and any improvement insulation, windows and heating systems. Other works would also be
permitted if they meet a cost effectiveness threshold. The freeholder would then be able to recover
the cost through the service charge. The freeholder is also granted rights of access to flats to carry
out the works.

Secondly, wherever a lease contains an absolute prohibition on alterations or improvements or where
it is subject to the consent of the freeholder, this would be modified so that in the case of energy
efficiency works, the freeholder is under a duty to give consent unless it is reasonable not to do so. It
would not be reasonable to refuse consent if the energy efficiency improvement does not cause any
structural or other harm to the building or substantially interfere with the rights of others in the
building. The burden of proving that consent has been reasonably refused would be on the freeholder.
Where the improvements require ancillary works to be undertaken on land retained by the landlord,
the landlord would be under a duty to grant such rights as are necessary and appropriate to facilitate
the works.

This Bill does not attempt to overcome every barrier. There will still remain other challenges that have
been alluded too not least that there is often little incentive for freeholders to undertake building level
improvements or to agree to leaseholders works. But it would at least solve one problem in a
straightforward way and that must be a good thing.

To illustrate the benefits of this reform, Future Climate have gathered information on one block in
North London where ground floor flat owners have cold and damp problems from an uninsulated floor.
Our reform could make it possible for that block to agree and share the costs of the required
insulation.