Local Government (Building Upgrade Agreements) Amendment Bill

Second Reading

Adjourned debate on second reading.

(Continued from 19 March 2015.)

The Hon. J.M.A. LENSINK (16:21): I rise to make some remarks in relation to this bill. The Local Government (Building Upgrade Agreements) Amendment Bill is a fulfilment of a Labor election commitment to upgrade sustainable commercial buildings. As the government says in its own commentary, it is designed 'to unlock barriers to invest in retrofitting improved energy, water and environmental performance of existing commercial buildings'.

Proposals for this scheme were promoted by the Premier's Climate Change Council, which endorsed advice to the former environment minister in April 2012. A draft bill was released on 30 January 2014 for a 10-week consultation process. This current bill was tabled in February 2015.

This legislation is shaped around similar models in Victoria (operating since 2010) and New South Wales (operating since 2011). A bipartisan approach has been taken in both those states; however, progress on adopting the schemes to perform upgrades has been slow. To date, seven upgrades have been entered into in Victoria, and New South Wales has had five local governments sign up to the scheme and five building upgrade agreements signed, with five currently in process.

In relation to the components of the bill, in terms of the building upgrade agreement, the bill establishes a voluntary (or section 3) mechanism between three parties (the provider of finance for the upgrades, the building owner and the local council) to enter into an agreement to allow money to be loaned in advance for the purpose of environmental upgrade works to be undertaken on an existing commercial building.

The council then issues a building upgrade charge, which is section 6 of the bill, which is levied against the land, paid by the building owner, to recoup the advance. These moneys are then returned to the financier by the council, which is section 7 of the bill. Originally the money was to be held in a trust account by council; however, after consultation, this provision appears to have been removed.

The council must also keep a publicly-available register of all building upgrade agreements (BUAs), section 13, and the minister may request the council report on their BUAs at any time (section 14). An important aspect of this bill is that the charge is tied directly to the land, rather than the building, otherwise it needs to be discharged.

If the building upgrade charge is not received by the council for a period of three years, the council has the authority to sell the land in accordance with regulations, under section 9 of the bill. The bill stipulates the order in which moneys collected through the sale are to be applied. This section was amended following consultation to reflect council concerns. Whilst the council must make every effort to recover outstanding moneys, the council is not liable for them.

Regarding the recovery of the contribution towards building upgrade charge from lessees, the other main component of the legislation enables costs to be passed onto, or recovered through, the tenants who, theoretically, gain significant efficiency rewards and savings from the upgrade. That is provided for in section 12(1). This bill enables the building owner to recover costs from tenants, firstly, if the tenants consent or, if they do not, if the amount recoverable by the building owner as a contribution does not exceed a reasonable estimate of the cost savings resulting from the upgrade.

The methodology in calculating this is yet to be determined by the government and will be published in the Gazette, and the government have advised they will consult across the board on the methodology to be used. I note that this is what has taken place in New South Wales and that, in Victoria, the tenant contribution is not compulsory. Before the tenant can be required to pay a contribution towards the charge, they are entitled to receive a copy of the BUA and must receive at a minimum written notice from the lessor if they consent. If the tenant does not consent, they will receive, at least 30 days prior to the first payment, written notice of their contribution, the time period in which the contribution is required to be paid and so on and so forth.

In regard to a dispute mechanism for tenants, the bill is silent. In the circumstance that dispute resolution is required between building owners/landlords and tenants, we have been advised that the Retail and Commercial Leases Act and the Residential Tenancies Act stand. I note (and I will refer to this in a moment) that Business SA has expressed concerns about this matter, while I note that the Property Council is satisfied with these measures because they believe it reduces red tape for building owners.

In our government briefing—for which I thank the minister and his officers—we were advised that the intention in relation to the administrative unit is to appoint either the Local Government Association or the Adelaide City Council to oversee the administration and that, if it is to be the LGA, they would recruit specifically for this role. However, this is not part of the bill and I am not satisfied with the fact that it is not explicit. There is clearly a potential conflict of interest for councils to have this role and I understand that the Property Council would have preferred an alternative to this model as well.

I thank the government for providing me with all of the consultation they received on this matter. I note that the council submissions, which were received from the City of Adelaide, Marion council, Onkaparinga and the LGA, were supportive of the bill. In fact, I would say that there are no stakeholders at all who do not support the concept in principle. I think it is a question of the details, which are yet to be determined.

I note that because there are three parties in the legislation to the BUAs—councils, the financial institutions which finance the upgrades and the building owner who all opt in on a voluntary basis—all of the stakeholders who represent those interests are supportive. However, outstanding issues remain, particularly for tenants. That is a concern of the opposition, and concern has been expressed to us, as I mentioned, by Business SA.

I am not going to be the one defending issues on talkback radio if some of these things go pear-shaped and tenants feel like they have been roped into this unfairly and that they have been charged more than they ought to have been. Therefore we require that some matters be resolved prior to this bill proceeding. We will support it at the second reading. I would just like to quote from Business SA's submission from 11 April last year. They say:

Although Business SA lends support to BUF, it is critical that all entities party to the costs and benefits of a BUF project are afforded equal rights to participate in any project. BUF should not override a tenant's existing lease arrangements if the tenant does not wish to make contributions towards an environmental building upgrade.

They make a number of points, but specifically they say:

Clause 12(3)(b)(ii) of the draft bill must be removed to protect the financial position of tenants, many of whom are small businesses. Although this section provides tenants only pay a contribution to BUF based on a reasonable estimate of cost savings, this puts the risk of cost savings not eventuating back on the tenant. Providing landlords have good relationships with tenants, we do not see any need for a clause in the draft bill which overrides a tenant's right to object to a BUF contribution. Business SA acknowledges the split incentive which is inherent with environmental upgrades, but considering BUF enables a cheaper form of finance—

And I note from the example from the City of Melbourne that the government provided that this is certainly true—

for capital improvements. Landlords will still benefit even without tenant contributions, which has been proven interstate. Furthermore, commercial property markets work on effective rents, and any improvement in outgoing costs will eventually improve a landlord's bargaining position based on rent.

I am sure the government has received a copy of that. The opposition's outstanding concerns with this are, firstly, that the administrative unit has not been explicitly clarified. We find that that situation where this legislation has been in government circles since 2012 unsatisfactory. There is also the matter of the metrics for the regulations. I understand there is not even a draft available on that matter yet, and that is also unsatisfactory.

In my discussions with our colleague, the Hon. John Darley, he has also raised issues particularly, which I am sure he will talk about, in relation to, not the financiers of the upgrade, but banks which have lent already and where they are in the queue. I think those concerns are certainly also relevant and I would like to have those matters clarified prior to the further passage of the bill. We will support the second reading, but we certainly will reserve our right at the third reading and trust that the minister will take some corrective action prior to the committee stage to address these matters.

The Hon. J.A. DARLEY (16:33): I rise to speak on the Local Government (Building Upgrade Agreements) Amendment Bill 2015. The aim of this bill is to address some of the barriers that are said to impede building upgrades from going ahead. According to the government, those barriers often 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 achieves its objectives by establishing a mechanism whereby a building upgrade agreement can be entered into on a voluntary basis between a local council, a building owner and a financier. Where the building in question is tenanted, a tenant can either consent to the agreement or be subject to a 'no worse off' test. In a nutshell, 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 property. The charge is paid by the building owner to recoup the money advanced by the financier.

Where a building is tenanted, the bill will enable the landowner to recover from the tenant contributions towards the building upgrades, provided that the tenant consents to the agreement or the amount recoverable by the owner as a contribution does not exceed a reasonable estimate of the cost savings to the tenant resulting from the upgrade works.

In effect, rather than benefit from a reduction in utilities, a tenant will continue to make similar payments for outgoings as they would have done prior to the upgrades, and the money recovered, by way of a charge from the tenant, will go towards paying the financier. That is a very simplistic overview but, in effect, that is how it is proposed the scheme will operate.

I have gone to some length to understand how this bill will work in practice and what the likely take-up rate will be. At the outset, I have to say that, whilst I appreciate the environmental underpinnings of the bill, there is very little about the detail of the proposal that I find convincing. In fact, there are four elements to the bill that I find concerning.

The first issue relates to tenants who will, in effect, have no option as to whether or not they will be caught up by the scheme. If a landowner, council and financier agree to an upgrade agreement, then the tenant will have to wear it, subject to some conditions. The benefit, of course, will be that tenants get to enjoy the upgrades, hopefully at no additional cost. My initial response to this aspect of the bill was, obviously, the potential for tenants paying more as a result of the upgrades than they would have otherwise paid, especially when we talk about 'reasonable estimates'.

When I asked about stakeholder input over this aspect of the bill during my briefing, I was advised that the Small Business Commissioner had raised similar concerns. The government has sought to remedy these concerns by indicating that the regulations will provide for a no worse-off test. The no worse-off test that is being proposed is, as I understand it, similar to that which exists in New South Wales. If a tenant can demonstrate they are worse off than they would have otherwise been had an agreement not been entered into, then moneys they paid would have to be reimbursed to them. The second and third issues are related, and they involve concerns over mortgage priorities: the values to be used in assessing projects and the proposed overleverage test.

Under an upgrade agreement, the loan is tied to the property, rather than the owner, and in the event that the premises in question are sold, the charge can remain with the property if the new purchaser agrees. In the event of default, the charge is also ranked senior to other existing mortgages and liabilities to the Crown. Indeed, it is this feature of the bill which enables financiers to offer building owners more attractive terms in the first instance.

According to the government, an overleverage test 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 upgrade finance. The test requires that the cumulative debt against the property, when added to the total value of the building upgrade charge, must not be greater than the capital value of the land prior to the upgrade works being undertaken.

The fact that the bill makes reference to the capital value rather than the security value of the land is concerning. As members would no doubt be aware, banks generally lend on security value, which is what you would expect a property to sell for in a forced sale. The capital value, on the other hand, is what the property would be expected to sell for between a prudent (but not anxious) seller and a prudent (but not anxious) buyer, both being fully conversant with the circumstances surrounding the sale. Using the capital value rather than the security value could mean that an existing mortgagee who would now be ranked second in terms of priority would not be able to recover their loss.

The bill requires a building owner to notify existing mortgagees of the intention to enter into a building upgrade agreement and of the particulars of the proposed building upgrade charge, but it appears to stop short of enabling the existing mortgagee to object to the agreement being entered into. Under normal circumstances, an existing mortgagee may not be overly worried about an additional charge against the land because their interest will be protected. In this situation, however, the interests of the existing mortgagee will, in effect, be bumped below those of the new financier.

Even if the existing mortgagee assesses the risk as too high, there is little they can do about it. Even though this will only ever (probably) become an issue where there is a forced sale, I remain to be convinced that financial institutions would be happy with a new loan taking precedence over an existing loan, bearing in mind that they play no part in agreeing to the upgrade agreement whatsoever. I would ask the minister to place on the record details of any discussions that have taken place with and/or submissions that have been received by financial institutions and related organisations on this point. I should also indicate at this stage that I propose to move amendments aimed at addressing each of the issues I have outlined.

The fourth issue relates to the associated administrative costs of the scheme and the potential for tenants to be hit with additional exorbitant expenses. As I understand it, the government is yet to settle on which body will be armed with the task of administering the scheme. One of the options being floated includes handing it over to the Local Government Association, which is considered more attractive, at least in terms of costs, than using the already established Sustainable Melbourne Fund.

This raises some concerns over potential conflicts of interest, given that councils will inevitably be caught up in and bound by any agreements entered into with building owners under the scheme. There seems to be very little detail available on what the cost structure will look like and it is important that the minister provide additional details with respect to this aspect of the bill. I would also ask the minister at this point whether any consideration has been given to the perceived conflict of interest that the LGA may have in administering the scheme and whether any consideration has been given to handing this aspect of the project over to the Small Business Commissioner. This may assist in ensuring that the scheme is geared towards protecting tenants.

It remains to be seen whether this bill will result in the sort of take-up rate that the government is anticipating. As I understand it, since the introduction of the legislation approximately $42 million worth of upgrades have been invested across 12 projects in New South Wales and Victoria. This includes seven environmental upgrades in the City of Melbourne, with a combined capital value of approximately $12.6 million, and five agreements in New South Wales, with a combined value of approximately $30 million.

I understand the value of the projects and take-up rate in Victoria has been less than that in New South Wales because the Victorian legislation requires tenants to consent to an agreement and that has proved to be a bit of a stumbling block. My office has met with the owners of one building that underwent an upgrade in Victoria and I know that in that case at least the landlord had to vacate all of his tenants in order to overcome this hurdle and enter into an upgrade agreement. I am advised that the landlord in that case still considered it a very worthwhile exercise because he was subsequently able to rent out the premises at an increased rental.

The Victorian take-up rate has also been somewhat restricted by virtue of the fact that the application of the scheme has been limited to the City of Melbourne. I understand that Victoria is now considering extending the coverage to all Victorian councils as a result. Putting the restrictions of the Victorian scheme to one side however, the take-up rate in both jurisdictions is still relatively low. On this point, I would ask the minister to advise potentially how many buildings may be eligible to enter into the scheme in the Adelaide CBD.

I appreciate the environmental principles underpinning this legislation and the importance of achieving long-term climate change, renewable energy, energy efficiency and sustainable water targets. I also appreciate the fact that the scheme itself is completely voluntary for those parties that wish to take part in it. I support measures aimed at creating positive social and environmental change and I support measures aimed at creating good financial returns which benefit the community more generally. That said, I think the concerns that I have raised are valid and warrant further consideration.

Commercial buildings around Adelaide are being vacated at an unprecedented rate because businesses can no longer afford the costs associated with their day-to-day operations. The last thing we want to do is create another layer of cost that will further tighten the squeeze on those businesses that have managed to keep their doors open. With that, I look forward to hearing from the minister on the issues I have raised.

Debate adjourned on motion of Hon. T.T. Ngo.