The heat is on for landlords
Time is running out for landlords affected by the new Heat Network Regulations
Landlords, whether of commercial or residential premises, urgently need to consider whether they are required to take action before the end of this month to comply with The Heat Network (Metering and Billing) Regulations. Even at this late stage, awareness is not what it should be, notwithstanding that failure to comply with the Regulations is a criminal offence.
The new Regulations implement the requirements of the European Energy Efficiency Directive and apply to ‘heat suppliers’. They therefore represent something of a trap for landlords, who may not readily identify with that title. A heat supplier is a person or company who supplies and charges for heating, cooling or hot water, through either communal heating or a district heat network.
The definition of communal heating ensures that landlords who supply heating, cooling or hot water to two or more tenants (or ‘customers’) in a single building and charge the tenants for that supply are classed as heat suppliers and must comply with the Regulations. Communal heating arrangements are common in all sectors, from shopping centres and office blocks to residential premises.
Government guidance confirms that the concept of charging for the supply includes not only situations where the supply is charged for separately, but also where the supply is included within a service charge and even includes all-inclusive rents.
Furthermore, tenants who install two or more sub-tenants (or even concessions in certain circumstances) without splitting essential services could also find themselves classed as heat suppliers. It is quite possible to have multiple heat suppliers within a single building.
Conversely, landlords who only supply heating, cooling or hot water to the common parts within a building, but not to the individual tenants’ premises, are not heat suppliers.
So, what are the consequences of being a heat supplier?
Firstly, affected landlords must provide prescribed detailed information about all their communal heating arrangements to the National Measurement and Regulation Office by 31 December 2015 and update that information every four years. The deadline was originally supposed to be April 2015, but it had to be put back due to lack of awareness.
Next, landlords must install meters by 31 December 2016 to measure each tenant’s consumption. Where this is not cost effective or technically feasible (assessed in accordance with detailed provisions in the Regulations), the landlord may instead install heat cost allocators, thermostatic radiator valves and hot water meters.
Finally, once meters or heat cost allocators have been installed, landlords must bill each tenant in accordance with their actual consumption. Although the obligations under the Regulations fall upon the landlord, it is actually the tenant whose behaviour they are seeking to change. In fact, the poor landlord derives no direct benefit from the time and cost that the Regulations require him to expend. The intention is that being billed for their actual usage should incentivise tenants to reduce their energy consumption.
The fatal flaw in the Regulations is that the obligation on landlords to charge tenants for communal heating according to usage will frequently contradict the existing contractual position between the parties as set out in the lease. The Regulations do not expressly override the express terms of the lease, although the Government is understood to believe that they do.
If that is the case, the Regulations really should tell landlords what they are supposed to do where the lease requires communal heating to be recharged on another basis, commonly as part of a square footage-based service charge. Similarly, are all-inclusive rents now supposed to vary depending on the tenant’s consumption? We should probably expect a further Amendment Order, or at least some guidance, during the course of 2016.
In the meantime, with 31 December 2015 fast approaching, landlords who have not already done so should review their portfolios without delay to identify any communal heating systems.
Bill Chandler is a Legal Director in the property team at Hill Dickinson solicitors.
One out of every five commercial properties in England and Wales will potentially become unlettable overnight when Minimum Energy Efficiency Standards come into force next year.
The legal effect of varying a lease can sometimes be to destroy the existing lease and bring a completely new lease into being, with unexpected and far-reaching consequences.
Linking lease rents to inflation is an easy and increasingly popular way of ensuring that rental income from commercial property does not lose touch with the market.