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Air Conditioning Costs and the banning of R22

From 2015, it will be illegal to use Hydrochlorofluorocarbons (HCFCs), including the ozone-depleting refrigerant gas R22, in refrigeration, heat pump and air conditioning (AC) systems.  R22 is commonly used in AC systems pre-dating 2004 and so its ban will have a major effect on air-conditioning costs.

R22 has not been legal for use in new AC equipment since 2004. In 2010, existing AC equipment became affected. A European Regulation (known as the ‘ODS Regulation’) imposed a ban in all EU Member States against the use of new (or "virgin") R22 to maintain existing AC equipment. Since then only recycled R22 obtained from decommissioned AC equipment or reclaimed R22 can be used. Such recycled or reclaimed R22 is becoming increasingly scarce and expensive.

This will change in 2015. From then AC systems will not be able to be topped up with any R22, whether that be virgin, recycled or reclaimed.

There will be two options for such AC systems:

Option 1: they are replaced by new AC equipment

Option 2: alternative modern refrigerant is used to top them up. This will normally involve having to replace parts of the current AC system.

Things to consider when choosing which is the better of these two options include:

  • the age of the current AC system;
  • the efficiency of the system;
  • leakage problems;
  • whether alternative refrigerants are compatible;
  • cost;
  • efficiency and availability of modern refrigerants,
  • and equipment manufacturers' advice about using modern refrigerants.

Some manufacturers suggest that using modern refrigerant in converted AC systems can lead to poorer equipment performance and so higher energy costs. Any increase in energy costs is something property owners and occupiers will want to avoid given recent legislative developments, such as the introduction of the Carbon Reduction Commitment Energy Efficiency Scheme and the passing of the Energy Act 2011. The Energy Act paves the way for new rules making it unlawful to let properties with low energy performance ratings without undertaking work to improve their energy performance.

The costs and practicalities involved may mean installing a new AC system will be the only viable option in many cases.

The key question for landlords and tenants is who will pay for these two options? Each will need to look at the particular wording of their lease to establish who will meet the expense. Repair clauses and statutory compliance clauses will be particularly relevant.

Multiple Occupancy

In a multi-let building, the service charge provisions will determine if the costs of dealing with the problem can be recovered by the landlord from its tenants. It will be important whether the provisions allow for the costs of repair, improvement and/or replacement of any AC system to be charged to the tenants.

What constitutes repair, improvement or replacement is not always black and white. For example, if the AC equipment is still able to function, although not in the most energy-efficient way, does that mean it is in disrepair? The RICS Code for Service Charges in Commercial Property (Second Edition) gives guidance on how to distinguish between the costs of repair, improvement and replacement when deciding whether to bill costs to the service charge, which may assist.

Prospective Tenants

For prospective tenants, repairing obligations will be relevant to discussions at the start of a lease. Such tenants may be reluctant to agree to a full repairing obligation in respect of AC equipment that contains R22 or may demand that the equipment be replaced before the lease commences.

A two- tier market for air conditioned premises could possibly emerge: with a divide between the rent achievable for premises with R22- dependent AC equipment and those premises without such equipment.

Professional advisers will need to bear in mind the impending ban when negotiating heads of terms and lease provisions.

Current Tenants

For current tenants it may be that those responsible for repair, improvement or replacement of AC equipment will factor that responsibility into their decision as to whether or not to exercise any break option.  Equally, such issues will be relevant to discussions about dilapidations at the expiry of a lease. How the ban will affect rent reviews remains to be seen.

Managing agents will have to consider what action must be taken before 2015 and whether the costs involved can be recovered from tenants.