Commercial clarity

In the downturn of the commercial property market we have seen a rise in the number of insolvent tenants and tenants vacating premises. Following their departure, property owners are often served with a claim from a utility supplier who has not been able to retrieve outstanding sums from the previous occupier. The Utilities Act 2000 and the Electricity Act 1989 seek to protect electricity and gas suppliers when this occurs.

The Office of Gas and Electricity Markets (Ofgem) is the government’s regulator for the electricity and natural gas markets in the UK, and has power to monitor the market, investigate whether supplier’s terms are unduly wrong and seek to provide consumers with guidance on the relevant legislation. It is important for owners to minimise the unrecoverable costs of their portfolios and understand the extent of their liability to utility suppliers and any impact on their Carbon Reduction Commitment Energy Efficiency Scheme (“CRC”), to avoid being left with any substantial charges.

Light reading
Ofgem sought to clarify the general principles of a deemed contract relationship in a letter of guidance released in October 2009. It established that a deemed contract is likely to exist upon termination/expiry of the original contract and that the supplier continues to supply services to the premises. Furthermore, this type of contract may exist where the original contract does not expressly provide for what will happen after termination and the existing customer continues to consume gas and/or electricity.

Ofgem however state that this is a: “general and non-binding view”, taking into account their interpretation of the legislation and original Government policy. Therefore the legal position will depend on the individual circumstances of each case, and ultimately cases will be left to the discretion of separate courts.

The fact that Ofgem readily admit some discrepancies, would appear to indicate there are still grey areas and a lack of clarity as to when a “deemed contract” arises and that Ofgem have received a number of enquiries from owners and suppliers on this issue.

An invoice from a utility supplier is usually split into standing charges (which are charges made for merely having the benefit of connection/supply pipes to the premises) and consumption charges. If the position from Ofgem is to apply, then unless an owner/occupier has consumed energy then a deemed contract cannot have arisen. Hence, a claim for just standing charges would not suffice to create a deemed contract. This would suggest that where no electricity or gas is consumed at the vacant premises there can be no charge where there is no contract in place.

Carbon strategies
The Carbon Reduction Commitment Energy Efficiency Scheme (“CRC “) came into force in the UK on 1st April 2010 but how has this effected utility supplies made under deemed contracts?

The CRC is a new carbon trading scheme which will force commercial and public sector managers to focus on reducing their organisation’s energy consumption. The scheme applies to organisations in the private and public sectors, operating in the UK, who are billed for more than 6,000 megawatt hours of electricity (approximately £500,000) per year through half hourly electricity meters. If an organisation falls within the scheme it will need to monitor, report and forecast energy consumption across its entire organisation. It will need also to buy carbon allowances to match the consumption it forecasts for the year ahead and surrender allowances according to its actual consumption in the year just ended.
In relation to a deemed contract in order to assess where the CRC responsibility lies, the party who ran-up the original energy bill will need to be identified. If this is the owner who bulk buys the energy then they will be responsible for that supply of CRC. If, however, the occupiers bought their supply directly from the utility supplier then the occupier will be CRC responsible (provided the occupier’s organisation qualifies for CRC in its own right). If a “deemed contract” has arisen between the owner and the utility supplier then it can be assumed that the owner will be responsible for that supply for CRC purposes.

Guiding management
To ensure that these pitfalls are avoided, businesses should take basic steps to make sure the contractual aspects of energy supply are fully understood. If an occupier is due to vacate, the owner should ascertain what utility services are in place and what action has been taken by the occupier in respect of such supply. In particular the owner should always request a copy of the occupier’s contract with the supplier in order to check the termination provisions.

Owners should also contact utility suppliers directly to ensure that no deemed contract has been implied, immediately upon the occupier vacating the premises and provide the occupier’s forwarding address details where known.

If a continued supply of power is required, for example where the property is vacant but intended to be re-let or needs a supply for alarms then it is advisable to negotiate a new contract for a low supply as the prices for deemed contracts can be considerably higher, sometimes up to 30 percent, than contracts of a longer term given the short term pricing policies.

Furthermore, costs for disconnecting and reconnecting supplies (which usually involve engineers coming to the property) can be upwards of £5,000. It is difficult for owners to have occupiers pay reconnection charges and receiving rental income in sooner may outweigh such costs for retaining a supply. Some utility companies do not charge for standing connection fees, only for supply and therefore it would be worthwhile for an owner to check suppliers’ terms.

Finally, where there is any claim for a deemed supply, this should be reviewed extensively. The right advice needs to be taken, ensuring that no charges are paid which remains the sole-responsibility of the previous occupier.