Putting your energy into addressing rising utility costs

30 November 2022

Nyree Applegarth, a Partner and Head of Property Disputes at Higgs LLP, looks at how rising energy costs could change the commercial tenant-landlord relationship.

These are unprecedented times for building occupiers, as far as energy utility costs are concerned.

There has never been a time when paying for gas and electric has been such a burden on occupiers, nor can I remember a time when there was a specific need in a lease document to address how utilities are provided and by whom, and a tenant’s flexibility to choose their own supplier.

It is very common in a commercial lease for a tenant to have to reimburse a landlord for energy costs but that can mean that a tenant has no control over the unit prices, the standing charges and ultimately the supplier the landlord chooses.

If a tenant has a lease where they are responsible for their own utilities and can make decisions about their suppliers, than that is currently a good place to be.

Similarly, if a tenant has a lease where their utility costs are rolled up into an inclusive rent then that can cap the amount of their outgoings. However, this is becoming a contentious issue on lease renewals and it is likely that landlords will resist inclusive rents so they don’t bear the burden of increasing energy costs, and risk their rental income being squeezed.

Although a landlord might be sympathetic to a tenant who is struggling to pay for the colossal increase in energy costs, if a lease obliges a tenant to pay for utilities when demanded by the landlord and they don’t pay, that can technically put them in breach of their lease terms.

Are we about to see tenants losing their leases because they can’t pay for utilities, and if so, how are the courts likely to react when applications for relief from forfeiture are made?

To avoid vacant units, landlords will be keen to keep the cost of their supplies as low as possible but in the future I foresee there is going to be much more scrutiny of lease terms by tenants to seek to minimise their costs and to give them some certainty about how much they will be paying.

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