Local Government (Building Upgrade Agreements) Amendment Bill

Introduction and First Reading

The Hon. I.K. HUNTER (Minister for Sustainability, Environment and Conservation, Minister for Water and the River Murray, Minister for Climate Change) (17:22): Obtained leave and introduced a bill for an act to amend the Local Government Act 1999. Read a first time.

Second Reading

The Hon. I.K. HUNTER (Minister for Sustainability, Environment and Conservation, Minister for Water and the River Murray, Minister for Climate Change) (17:22): I move:

That this bill be now read a second time.

The South Australian government recognises that economic development and environmental benefits are not mutually exclusive. The introduction of Building Upgrade Finance is a clear demonstration of this. The Local Government (Building Upgrade Agreements) Amendment Bill 2015 is a first step in delivering the state government's commitment to establish a Building Upgrade Finance mechanism in South Australia.

The South Australian government recognises the importance of improving the environmental performance of our ageing buildings. One-fifth of our greenhouse gas emissions comes from the energy used in buildings, with new development adding less than 5 per cent to our building stock every year. It is quite clear that upgrading our existing buildings is critical to achieving the state's long-term climate change, renewable energy, energy efficiency and sustainable water use targets and vibrancy aspirations.

Upgrading buildings also makes economic sense, not only for building owners and occupiers as a means of managing their utility costs but for the green industries that can provide the clean technologies and solutions that lift building performance. The state government has a proven record in supporting and encouraging sustainable developments. We introduced energy efficiency and sustainability performance requirements to government's own accommodation, we increased requirements for the energy efficiency of both residential and commercial buildings in line with the National Strategy on Energy Efficiency, and we introduced a cool rooves requirement for commercial buildings in the Building Code of Australia as a state variation.

We also introduced the Residential Energy Efficiency Scheme and continued it with some changes until 2020 as the Retailer Energy Efficiency Scheme. The new scheme will maintain focus on delivering energy efficiency benefits to low-income households and enable activities to also be delivered to small and medium businesses.

We developed a water-sensitive urban design policy and we provided financial support to projects demonstrating innovative ways to reduce the carbon footprint of existing commercial buildings through the now completed $2 million Building Innovation Fund. We also facilitated the delivery of sustainable precincts, such as the Bowden and Tonsley developments and, previously, the Lochiel Park Green Village.

The South Australian government also understands the need for further action to tackle market barriers that often impede commercial building upgrades from going ahead. Key barriers include access to the capital to fund upgrade projects, and the split incentive between landlords and tenants in leased buildings, where the building owner incurs the cost of the upgrade, but the tenant receives the benefits through reduced utility bills and improved accommodation.

The bill establishes a mechanism specifically designed to overcome these barriers, thereby helping to unlock retrofitting activity and realise the associated environmental and economic benefits. Equivalent mechanisms have already been established in the City of Melbourne and New South Wales, making South Australia the third Australian jurisdiction to establish a mechanism. In developing this bill we have drawn upon the best of the interstate legislative models, and have sought to harmonise with these as much as possible.

Under the Building Upgrade Finance mechanism, a local council can voluntarily enter into a building upgrade agreement with a building owner and a financier. Under a building upgrade agreement the building owner agrees to undertake upgrade works in respect of their building. The financier agrees to advance money to the building owner for the purpose of funding the upgrade works, and the council agrees to levy a building upgrade charge against the land on which the building is situated. This charge is paid by the building owner to recoup the money advanced by the financier for the upgrade works, and is passed on to the financier by the council once received from the building owner.

As a result of the arrangement, the loan is effectively tied to the property rather than the property owner, with loan repayments collected via the building upgrade charge. In the event of the transfer of ownership of the property, the charge can remain with the property if the purchaser so agrees. The strength of the mechanism lies within this statutory charge. The charge effectively secures the loan, being ranked senior to mortgages, taxes and other charges in the event of default. This provides heightened security to the financier, allowing them to offer finance to the building owner at more attractive terms.

Under many commercial leases, tenants pay local government charges. Building Upgrade Finance provides an avenue for building owners and tenants to share the costs and benefits of building upgrades. These features collectively help to overcome the access to finance and split incentive barriers previously described, thereby helping to unlock investment in building retrofits and realising the associated economic and environmental benefits. The bill provides for the introduction of this mechanism in our state and builds on an extensive body of work undertaken by the state government in collaboration with local government.

In April 2012, the Premier's Climate Change Council endorsed advice to the former minister for sustainability, environment and conservation, recommending that the South Australian government work with the local government sector to develop the business model and the business case for establishing Building Upgrade Finance for commercial buildings in South Australia.

The state government listened. In 2012, we issued a consultation paper seeking views from stakeholders regarding the establishment of the mechanism in our state. Feedback from the property, finance and local government sectors indicated overall support for the intent of the mechanism, and indicated the need for further investigations.

We also undertook an investigation into the location and potential scale of the commercial building retrofitting opportunity in South Australia. Modelling undertaken in 2012 concluded that the retrofitting potential of commercial office buildings in the Adelaide CBD and fringe alone could unlock significant capital investment in environmental upgrades, generate jobs and achieve greenhouse gas savings.

Further, in collaboration with the Local Government Association of South Australia and the Adelaide City Council, the state government undertook the development of a business model and business case for Building Upgrade Finance in South Australia. The business case completed in 2013 determined that Building Upgrade Finance could unlock significant investment in building upgrades in the Adelaide CBD alone.

We subsequently developed the draft legislation, which we released on 30 January 2014 for a 10-week public consultation process. Consultation closed on 11 April 2014 and feedback from the property, finance and local government sectors was received. It was carefully considered and has informed the bill.

In summary, the bill contains enabling amendments to the Local Government Act 1999 which:

authorise South Australian councils to enter into building upgrade agreements with owners of existing buildings and finance providers;

authorise councils to levy a building upgrade charge against land subject to a building upgrade agreement;

provide for a building owner to recover contributions towards a building upgrade charge from tenants occupying the building, providing certain conditions are met; and

provide for the establishment of subsequent regulations.

The bill extends the scope of the mechanism to environmental upgrades, which are defined as works that improve the energy, water or environmental efficiency or sustainability of a building. The bill also provides for flexibility to apply the mechanism more broadly in the future by extending the eligibility to other upgrades via the regulation. The state government intends to utilise this provision to deliver on the second part of its commitment to extend the mechanism to heritage upgrades. Stakeholders will be consulted regarding this approach prior to finalising a subsequent regulation.

The bill provides for the inclusion of buildings situated on various types of crown land. In cases where there is a custodian of crown land, the bill specifies that the minister responsible for administration of the Crown Management Act 2009 can delegate the power to enter into a building upgrade agreement to this custodian. The legislation restricts the application of the mechanism to existing buildings, which are defined as buildings constructed at least two years prior to the making of the building upgrade agreement.

It also provides for further restriction of the scope of the mechanism via the regulation. It is intended that the regulation will restrict the mechanism to commercial buildings, defined as buildings used wholly or predominantly for commercial, industrial or other non-residential purposes. The bill also authorises local councils to enter into a building upgrade agreement with a financier and a building owner to give effect to the arrangement described earlier. Other persons can also become a party to the agreement if the local council, the financier and the building owner agree.

The bill specifies an 'overleverage' test which is to apply to all eligible projects to minimise any financial risks to the financier and to the first mortgagee and to ensure the viability of projects that obtain building upgrade finance. The test requires that the cumulative debt against the property, when added to the total value of the building upgrade charge, must be no greater than the capital value of the land prior to the upgrade works being undertaken.

In addition, the bill specifies the requirements of a building upgrade agreement and its contents. Subject to the passage of the bill through parliament, the state government will develop a building upgrade agreement template to assist local councils, financiers and the property industry with entering into the tripartite agreement and to reduce their legal costs. The provisions stipulate that within 28 days after entering into a building upgrade agreement, the council is required to declare a building upgrade charge in respect of the relevant land and to issue the building owner with a notice.

The bill specifies information that needs to appear in the notice and provides for further specification via regulation if required. Money paid to the council in respect of the building upgrade charge must be passed on by the council to the finance provider, after deduction of any authorised council fees. To ensure that any prospective buyer of a property that is subject to a building upgrade agreement is informed of the building upgrade charge, the bill requires the building upgrade charge be included in the council's certificate of liabilities. It also provides for adjustment of building upgrade charge payments in the event of the termination of a building upgrade agreement before all funds are advanced to the building owner.

The bill provides for councils to sell relevant land if a building upgrade charge remains unpaid for more than three years. This is consistent with existing sale of land powers with respect to unpaid council rates under the Local Government Act 1999. It also specifies the order of payment of outstanding debts against the property, where the liability against a building upgrade charge ranks above registered mortgages and any liability to the Crown. However, the sale of land provisions do not apply to crown land. Participation in the mechanism is voluntary and no party can be obligated to participate. For local councils this means that they can choose whether or not to offer this service within their municipal areas.

The bill is designed to ensure that local councils are not exposed to any additional financial liability associated with their role in administering the mechanism. Most importantly, the bill is clear that councils are not liable to pass any money on to the financier until the building upgrade charge has been paid to or recovered by the council. The councils are required to use their best endeavours to recover the charge but failure by a building owner to pay the building upgrade charge does not make the council liable to pay any outstanding amount to the financier.

This legislation provides for a building owner to recover contributions towards a building upgrade charge from a tenant occupying the building as a means of enabling building owners and tenants to share the costs and benefits of the building upgrades. This applies despite the provisions of the Retail and Commercial Leases Act 1995 for leases captured under this act. To ensure that this occurs in a fair and transparent manner without adding administrative complexity, the bill specifies two pathways under which the tenant contribution can be recovered by the building owner, which are if:

the tenant consents; or

the amount recoverable by the building owner as a contribution does not exceed a reasonable estimate of the cost savings to the tenant resulting from the upgrade works during the period to which the contribution relates. The cost savings must be estimated in accordance with an approved methodology which will be developed by the state government and published in the Government Gazette.

It is anticipated that further provisions relating to this pathway will be defined through a subsequent regulation. In particular, it is envisaged that, under regulations, building owners would be required to report regularly on the actual cost savings to tenants using the approved methodology, unless otherwise agreed. The subsequent regulation is also anticipated to provide for make-good provisions in the event that the tenant's contribution has exceeded their actual cost savings. Stakeholders will be consulted regarding these additional requirements prior to finalising the subsequent regulation.

The bill also requires participating councils to maintain a register of building upgrade agreements accessible to the public free of charge. It entitles the minister to require reports from councils on building upgrade agreements entered into by the council, and provides for the setting of regulations if required to support the enabling legislation.

To assist building owners with taking advantage of this new financing mechanism and to minimise resource impacts on local councils, the state government has committed $1.9 million over four years for the establishment and operation of Building Upgrade Finance in South Australia through the 2014 budget. Part of the funding will be used to develop the building upgrade agreement template and the approved methodology for estimating cost savings; to facilitate an initial suite of projects as a means of building capacity and educating the industry; and to undertake a review of the mechanism in its third year of operation.

The majority of this funding is envisaged to go towards the establishment, and operation over four years, of a central administrator. The administrator is expected to support participating councils, by undertaking most of the functions associated with the administration of building upgrade agreements, and to reduce associated costs to participating councils. This is consistent with the feedback we received through consultation. Subject to the passage of this bill through parliament, the state government will continue to work with local government to develop a robust delivery framework.

Since we have started on this journey, the awareness of this new financing mechanism has increased both nationally and in the state. Victoria is moving to extend the coverage of the mechanism beyond the City of Melbourne to all Victorian councils. The Australian government has also provided funding to Climate Works Australia and the Sustainable Melbourne Fund for a campaign to improve awareness, information, resources and skills across the property sector in relation to these mechanisms.

Two financiers have established dedicated Environmental Upgrade Agreement Investment Funds in partnership with the Australian Clean Energy Finance Corporation totalling over $100 million to invest in such projects, and a third financier is active in the market. Approximately $42 million has been invested to date in Victoria and New South Wales. Other states, territories and cities have commenced investigations into the establishment of similar mechanisms in their jurisdictions and are watching what is happening in South Australia.

This bill responds to the Premier's Climate Change Council's advice, 'South Australia's climate change vision: pathways to 2050', released in February of last year, which identified the development and promotion of Building Upgrade Finance as a priority action.

The South Australian Division of the Property Council of Australia is supportive of the introduction of the mechanism, and Business SA also gave its in-principle support via its 2014 Charter for a More Prosperous South Australia. The bill has the in-principle support of the Local Government Association of South Australia. The Adelaide City Council has also notified the state government of its continued in-principle support for the establishment of Building Upgrade Finance in South Australia.

The commitment to develop Building Upgrade Finance in South Australia is also outlined in the climate change sector agreement between the state government and the Local Government Association of South Australia, which was renewed in 2013. I commend the bill to members, and I seek leave to have the explanation of clauses inserted in Hansard without my reading it.

Leave granted.

Explanation of Clauses

Part 1—Preliminary

1—Short title

2—Commencement

3—Amendment provisions

These clauses are formal.

Part 2—Amendment of Local Government Act 1999

4—Amendment of section 4—Interpretation

The proposed amendment inserts definitions related to proposed Schedule 1B.

5—Amendment of section 44—Delegations

The proposed amendment amends section 44 so as to prevent a council from delegating certain powers relating to building upgrade agreements, except to the chief executive officer of the council (who may not subdelegate the powers).

6—Amendment of section 187—Certificate of liabilities

This amendment is consequential on the insertion of Schedule 1B.

7—Insertion of Schedule 1B

This clause proposes to insert Schedule 1B into the principal Act:

Schedule 1B—Building upgrade agreements

Proposed Schedule 1B provides for a building owner, a council and a finance provider to enter into an agreement (a building upgrade agreement) under which the finance provider advances money to the building owner to undertake upgrade works on the building and the council agrees to levy a charge on the land on which the building is situated (a building upgrade charge) to be paid by the building owner for the purpose of recouping the money advanced.

Certain restrictions (for example, on the types of buildings that may be the subject of building upgrade agreements) are provided for.

Proposed Schedule 1B also makes provision in relation to the contents of building upgrade agreements, the voluntary nature of agreements and the variation or termination of agreements.

A council which enters into an agreement is required to declare a building upgrade charge in relation to the agreement and give notice of the charge to the building owner specifying particular details. The Schedule makes provision for the payment of the charge and provides that a building upgrade charge is a charge against the land.

Proposed Schedule 1B empowers a council to sell the relevant land if a building upgrade charge remains unpaid for more than 3 years. Provision is made in relation to matters related to the sale of land, including the order in which the proceeds from such a sale are to be applied.

A council is not liable for the failure by a building owner to pay a building upgrade charge; a council is required to use its best endeavours to recover a charge.

Proposed Schedule 1B authorises a lessor to recover a contribution towards a building upgrade charge from a lessee within a building so long as the lessor complies with specified requirements.

A council must keep a register of building upgrade agreements and may be required to provide a report to the Minister on building upgrade agreements.

Regulations may be made for the purposes of Schedule 1B.

8—Amendment of Schedule 6—Charges over land

This amendment is consequential.

Schedule 1—Transitional provision

1—Variation of term of lease—contribution towards building upgrade charge

This clause inserts a transitional provision for the purposes of the measure.

Debate adjourned on motion of Hon. T.J. Stephens.