Perplexed by property law? Our Professional Support Lawyer Gemma Cook is here to answer your most pressing questions.
We are a tenant in a building and the landlord manages the electricity supply costs for the building as a whole. We are concerned about the significant increases in the cost of electricity. Are there any controls on the costs the landlord can impose on us in our lease?
Every lease will contain terms which govern the costs a landlord can recover from a tenant, and this would include electricity costs. The precise text of each lease will differ and would need to be checked individually but typically, a tenant would usually pay for the electricity it uses:
- to the landlord in arrears, based on a sub-meter reading if the building is a multi-occupied building; or
- to the supplier directly where the tenant occupies the whole of a building, based on a direct metred supply with the energy company.
Leases in England and Wales do not normally have controls on the price the tenants pay for electricity when it is sub-metered. The costs will be calculated based on use and the cost per unit will be determined by the contract between the landlord and the energy supplier. Where a tenant has a lease of the whole of the building, it would usually be the case that the cost per unit will be determined by the contract between the tenant and the energy supplier and the tenant will have been in control over the terms of that supply.
There may be some control over the costs of the electricity used as by the common parts of the building in the service charge. At the time the tenant takes a lease, it might have negotiated a cap on the service charge costs which could limit the ability of the landlord to pass on all of the costs to the tenants.
The Service Charge Code is UK best practice. The Code does compel a landlord to undertake re-tendering at reasonable intervals and select best value (not necessarily the cheapest price). This is for all services including electricity. A tenant should check the terms of its lease to see if the landlord is obliged to follow the Code. It would depend on the age of the lease as older leases are less likely to have this covenant. The Code is now mandatory for RICS professionals who, as matter of professional practice, should “have regard”.
In terms of future increases on energy costs, it is unlikely that a lease contains an obligation on a landlord to tell the tenant that the costs are going to increase. If the energy costs are covered by way of service charge (such as the costs for the common parts), the costs would usually form part of the annual service charge estimates. But given costs are increasing so often, that annual estimate might not be often enough to capture all of the increases.
Energy inflation costs are a significant concern for all. Much of the press concerns the effect on households but the pressures will equally apply to landlords and tenants alike, especially as the OFGEM energy cap does not benefit businesses.
As George Cornell comments in his article on the importance of environmental credentials, the rising energy costs may well be another motivation for landlords and tenants to improve the environmental efficiencies of their buildings. Tenants are going to be looking to decrease their operating costs and improve their environmental credentials. Landlords will also need to adapt too to attract tenants to the buildings and comply with energy performance certificate (“EPC“) requirements and the minimum energy efficiency standards (“MEES“), further details of which are summarised in George’s article as a handy reminder.
The increasing cost pressures on tenants may well encourage landlords to act more creatively. It isn’t in the interests of a landlord to see their tenants struggle financially, cease trading and even worse, vacate. In order to assist tenants, landlords might look to reduce energy costs by implementing other energy regimes, such as solar panels on the roof of multi let buildings, to generate cheaper electricity that benefits the building.
Key points
- Energy inflation costs are a significant concern for all, including businesses as they do not benefit from the OFGEM energy cap.
- Leases in England and Wales do not normally have controls on the price the tenants pay for electricity.
- It is unlikely that a lease contains an obligation on a landlord to tell the tenant that the costs are going to increase.
- Landlords and tenants are going to have to come up with practical measures.