Insights / October 5th, 2016

It’s time to get BUF!

What is Building Upgrade Finance?

Building Upgrade Finance (“BUF”) is a mechanism through which local Councils, financiers and landlords voluntarily join forces for the purpose of improving a building’s sustainability. BUF is an initiative that helps support the SA Government’s goal of becoming the world’s first carbon neutral city.

How it works?

The specific terms of BUF would be detailed in a Building Upgrade Agreement (“BUA”) to be entered into between the local Council, financier and building owner/landlord, and which operates broadly as below.

As the diagram shows, the finance provided to the landlord by the financier for the building upgrade is secured by way of a charge over the land. This charge is incorporated into the Council rates. Once the landlord pays the Council rates, the Council then repays the financier (less the Council’s administration costs).

It is not yet clear what the BUA will look like but it is anticipated that the State Government will develop a standard BUA template to deal with the transfer of responsibility upon building ownership changes and the Council’s powers of sale when the building upgrade charge is not paid.

Interesting features of BUF

  • BUF applies to existing buildings, built at least two years before the making of a BUA. However, the exact type of building that is eligible for a BUA will be prescribed by Regulations. It is expected that BUF will apply to existing commercial buildings.
  • If land within a BUA is subsequently sold, the building upgrade charge can remain over the land if agreed to by the purchaser. While we do not yet know how BUF will respond to a purchaser who does not consent to the charge, it is anticipated that it would be upon the same basis as any charge on the land at sale and would need to be discharged prior to settlement.
  • If the repayment of the building upgrade charge has been outstanding for over three years, the Council may seek to exercise its statutory powers to sell the relevant land. If this were to occur, repayment of the building upgrade charge from the proceeds of the sale ranks higher than mortgages, encumbrances or other charges. Landlords will need to consider whether this may impact on any security requirements they have with their financier.
  • An upgraded building can provide just as many benefits to tenants as it can to landlords, including the likelihood of reduced outgoings and utility charges. Depending on the terms of the lease, a landlord may be able to recover the costs of the building upgrade charge as an outgoing payable under the lease.

Where to from here?

BUF is implemented through amendments to the Local Government Act 1999 and associated Regulations. The amendments have passed both houses of parliament, but have not yet commenced. We understand that the Regulations are currently being drafted.

Once the legislation has been enacted, the current view in industry is that government tenants may at first instance be the “driver” of BUF. However, as the scheme becomes more commonly used, private tenants may seek to use BUF to upgrade some of the increasing older building stock in the market.

We will provide a further update once BUF is operational. If you would like more information about BUF, or would like to speak to one of our team, please contact us.