The Lower House of the German Parliament (Deutscher Bundestag) passed the Act on the Allocation of Carbon Dioxide Costs (Carbon Dioxide Cost Allocation Act - CO2KostAufG on August 24, 2022, printed matter (Bundesdrucksache) 20/3172) on November 10, 2022 (the “Act”). This alert aims to highlight the potential practical consequences of this legislation.
The Act provides a new allocation of the cost of carbon dioxide prices between landlords and tenants. On the landlord side, the Act is intended to incentivize energy-efficient renovations, and on the tenant side, to encourage energy-efficient behavior.
Since the Fuel Emissions Trading Act (BEHG) entered into force on January 1, 2021, utility companies that bring fossil fuels (heating oil, gas, gasoline, or diesel) into the German market must pay a carbon dioxide price (Kohlendioxidpreis). This carbon dioxide price will increase continuously through annual determinations until 2025. The carbon dioxide price is passed onto the customer by utility companies as part of the cost of heating oil, natural gas, etc. This has led to higher costs for heating and hot water supply to buildings. Previously, landlords were able to pass on the full amount of carbon dioxide costs to tenants as part of the annual service charge settlement (Nebenkostenabrechnung), provided the apportionment was contractually agreed upon (e.g., apportionment of heating costs). Such an apportionment will no longer be possible in the future under the Act. Instead, the Act provides for mandatory cost allocation between the landlord and the tenant as of January 1, 2023. The anticipated cost apportionment differs according to whether the rented premises are residential or non-residential (e.g., commercial).
The following is intended to provide an overview of the main aspects of the current and new legal situation with regard to the apportionment of the carbon dioxide price costs:
Current legal situation
The allocation of the carbon dioxide price for commercial and residential rental space is currently determined by the relevant parties (landlord and tenant) and is therefore discretionary. Generally, heating costs are typically apportioned to the tenant. The carbon dioxide costs can be allocated as part of the heating costs and therefore, in practice, the tenant currently bears the full amount of the carbon dioxide price costs.
New legal situation (as of January 1, 2023)
Under the Act, the allocation of carbon dioxide costs is no longer discretionary or negotiable. Instead, the Act provides mandatory provisions for cost apportionment.
The German Federal Government plans to introduce an electronic application for calculating and apportioning carbon dioxide price costs between landlords and tenants.
What cost allocation is planned for residential buildings?
For residential leases, a 10-stage model for sharing carbon dioxide price costs between landlord and tenant will be established. Under the 10-stage model, carbon dioxide costs are allocated according to the building's carbon dioxide emissions per square meter of living space, and thus on the basis of the building's energy quality. According to this model, the higher the CO2 emissions of a building, the more the landlord pays; the better the energy efficiency, the more the tenant pays. Depending on the classification, the tenant may be required to pay 100% (stage 1: energy standard EH55 of the building) of the costs, or the landlord 95% of the costs (stage 10).
What cost allocation is planned for non-residential buildings (e.g. commercial leases)?
For commercial leases, a 50/50 split of the carbon dioxide price costs between landlord and tenant is planned. There are additional plans to replace the 50/50 model with a tiered model (Stufenmodell) for non-residential buildings by 2025. The necessary data for the tiered model shall be compiled by the end of 2024.
What cost allocation is planned for mixed-use properties?
The Act currently differentiates between residential and non-residential buildings only. According to the the Act’s explanatory memorandum, the predominant purpose of a building is decisive for its classification as a residential or non-residential building pursuant to § 3 Abs. 1 Nr. 33 of the German Energy Act for Buildings (GEG). According to the explanatory memorandum, if a building is rented in equal parts for residential and other purposes, the 10-stage model is applied to the residential part and the 50/50 model to the commercial part pursuant to § 106 GEG.
Exceptions to the allocation of costs
The landlord may be entitled to reduce their contribution according to the 10-stage model or the 50/50 model under certain circumstances. A reduction of the landlord's share is possible, for example, if the landlord demonstrates that a significant energy improvement of the building or the heat and hot water supply is prevented by public law requirements (e.g., monuments protection (Denkmalschutz)). In these cases, the landlord's share is reduced by half.
If the landlord has no ability to achieve a better building classification (i.e., neither a significant improvement of the building facade nor of the heating technology), the landlord's share of the carbon dioxide price costs can be completely waived.
What does that mean for direct suppliers (Direktversorger)?
In order not to disadvantage tenants who contract directly with the suppliers, the utility company is obliged to inform (Informationspflicht) the tenant of the costs, and the landlord is obliged to reimburse these costs (Erstattungspflicht). The reimbursement amount depends on whether the tenant is contracted under the 10-stage model (residential) or the 50/50 model (commercial).
What does this mean for existing leases (Bestandsmietverträge)?
Lease agreements concluded before January 1, 2023 will remain in place, but the Act will retroactively apply the new carbon dioxide price costs to these leases. Carbon dioxide costs resulting from the consumption of fuel (Brennstoff) billed prior to January 1, 2023 will not be taken into account.
What should be considered when concluding future lease agreements?
Agreements under which the tenant is paying for more of the carbon dioxide price costs than required by law are invalid. This invalidity may result in the allocation of the heating costs (which carbon dioxide costs are a part of) being considered invalid as a whole. Accordingly, there is a risk that the landlord will then have to bear these heating costs in full.
If the landlord does not disclose the share of the carbon dioxide price costs to their tenant or does not provide to them information required by the Act (classification of the building and basis of calculation), the tenant may reduce its share of the heating costs by 3 percent.
If you have any questions concerning the Carbon Dioxide Cost Allocation Act, please do not hesitate to contact the authors of this alert.