New practice: Energy crisis prompts commercial landlords and tenants to act

Both should check their leases to determine how energy costs are dealt with. If the lease says tenants must pay energy costs directly to a supplier they may be able to negotiate better terms and get some protection against future price rises.

If the landlord arranges the supply, whether for the tenant’s premises or just for common parts, it may be covered as part of an all-inclusive rent, which means the landlord rather than the tenant bears the burden of any increase. In that case, the landlord may want to renegotiate the lease, as increasing energy costs will make an all-inclusive rent less and less attractive to the landlord.

Alternatively, the tenant may be paying for its energy supply separately as one of the elements in their service charges imposed by the landlord, in which case the service charge will increase to allow the landlord to recover the increased energy costs.

The tenant in that case appears to have no control over the costs the landlord incurs. However, the landlord is still likely to want to keep energy costs low, to keep the premises as attractive as possible to future tenants if they need to find a replacement for the current tenant – and in case the landlord finds itself paying these costs during any period where the premises are empty.

The tenant will be in breach of the lease if they fail to pay service charges in full. The tenant should ask the landlord to disclose and discuss any energy cost-reducing plans that could affect the service charges made, so they can comment and plan.

Some landlords may want to make energy savings by reducing services such as heating and lighting, lifts and car park barriers. They need to be sure that any cost-cutting does not cause them to fall below their minimum legal obligations to provide such services in the lease. Opening a dialogue with the tenant about possible cost-cutting measures early on will save misunderstandings and possible disputes later.

A landlord and tenant may also plan to cut expenditure on other costs, to help offset rising energy costs. For example, by reducing the time and money spent on maintenance and repairs. Again, whoever is responsible for these should check their leases to make sure they are legally entitled to make the planned cuts and open a dialogue.

Landlords and tenants should particularly consider their respective legal obligations and liabilities in the event of power cuts. Landlords may be able to argue they are not liable for tenant losses and costs arising from a power cuts because of ‘force majeure’, as the power cut is out of their control. But even if that argument succeeds, there may still be an obligation for the landlord to help the tenant mitigate the effects of a power cut by, for example, installing a generator or other back-up power supply. If so, landlords must ensure they can source these – they are likely to be in short supply – and determine whether they can recover the costs from the tenant in the service charges.

Both should also ensure that precautions are taken to prevent any damage to premises or equipment that a power cut could cause – for example, where operations dependent on electrical supply will be disrupted such as lifts or security systems giving access to the premises. Cuts could also create health and safety issues for staff – for example, where they have to work in unlit areas, or in areas where lack of power creates a security risk - or fire risks, with the attendant legal liabilities, unless the parties have assessed these risks and planned for them.

The parties will want to ensure their insurance provides them with the necessary cover if there are power cuts.

Some retail tenants are obliged to remain open during trading hours. In the event of power cuts, such tenants should check what their lease allows before planning shut-downs during power cuts. Where rent is payable by reference to turnover, the landlord will want to check whether the lease caters for forced closures as these will inevitably reduce retail tenants’ turnovers. Again, business interruption insurance should be checked to see if it covers loss of rent in these circumstances.

Tenants whose energy costs may create financial difficulties generally may be able to negotiate reduced rents or more frequent payment periods to alleviate the situation.

Operative date

• Now

Recommendation

• Commercial landlords and tenants should plan how they will reduce or mitigate energy costs and deal with power cuts while still complying with their leases, safeguarding premises and equipment, and keeping staff safe.
• Landlords and tenants should disclose and discuss their plans to avoid disputes later.
• Both landlord and tenant should also check their insurance to make sure they have appropriate cover.