Jul

What are “Deemed Contracts” and how do they affect Landlords?

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Especially at a time like this, in the middle of a pandemic, when good commercial tenants are hard to find, landlords dread the time when a lease comes to an end, or their tenant goes into administration.

When a commercial landlord loses a tenant, not only do they lose regular rent payments, they also lose all the other payments that their tenants have to find: insurance for the building, business rates, utilities charges and if its a full-insuring and repairing lease, the maintenance costs for the building’s upkeep.

After a 3-month vacancy, in most cases the landlord becomes responsible for paying full business rates, a substantial item which in many cases roughly equates to the rent amount.

Also, because of the increased risk with an empty building, not only does the landlord now take on the cost of providing building insurance, this often approximately doubles in price. Depending on the location the landlord may be forced into taking extra security measures, hiring specialists with alarms, cameras and guard patrols. In some cases it’s even prudent to install live-in guardians.

The Deemed Contract

Something that’s often overlooked is utilities charges and this is where “deemed contracts” come in.

Tenants will often shop around for the best deals they can get from various utilities suppliers, which means that if landlords have several commercial units vacant at any one time they could be dealing with numerous utilities companies.

This may not sound too onerous but that’s deceiving, it can become an administrative nightmare task that takes up a considerable amount of management time.

Who is liable to pay?

Whether the landlords takes back the property because the lease comes to an end, and the tenant does not want to renew, the tenant goes into administration or the landlord decides to forfeit the lease, it is likely that there will be utilities contracts in place.

The law says that even though there is no direct contract between the landlord and the utility supplier, because the tenant signed, a contract is “deemed” to be in place between the supplier and the landlord.

So therefore, gas, electricity, telephone and internet serves and water will possibly all be supplied by way of a deemed contract. Of course, when the property is empty not all these services will be in use, but the supplier will be entitled to invoice for regular (usually quarterly) standing charges.

Also, the landlord may want to retain some of the supplies: electricity for lighting, alarms etc, gas for heating, especially in winter when pipes could otherwise freeze, and water for sprinklers etc.

The Legal Context

The electricity companies rely on the Electricity Act 1989 to give them legal authority, which states that “where electricity is supplied otherwise than in pursuance of a contract, the supplier shall be deemed to have contacted with the occupier (ie., the owner if the premises are unoccupied) for the supply of electricity.” There are similar provisions in place for gas services embodied in the Gas Act 1986.

A quirk of this legislation is that it makes the occupier not necessarily the tenant responsible for the contract. So if the tenant has vacated the premises, even though the lease is still current and in place, the occupier (in this case the owner) becomes liable.

Of course there would be nothing to stop the owner in turn pursuing the tenant for the costs, but as was pointed out above, the whole thing becomes an administrative nightmare for the landlord, especially if the landlord has several units vacant and is dealing with several different suppliers – taking readings, dealing with standing charges invoices etc.

Usually, the financial cost is not great from the individual suppliers, but multiply those costs over several suppliers and property units, not counting the time taken to administer all of this, and the costs mount up.

Complications always arise because the supplying utility companies base their initial charges on previous consumption patterns, so meter readings will need to be agreed and verified and adjustments made to the billing invoices before a void property usage pattern can be established.

Take evasive action early on

When you know that a unit is becoming vacant, or soon after it has done so, you should find out which companies have been supplying the services to the previous tenant.

Makes sure you take accurate meter readings, preferably with photo evidence, so that the charges can be accurately apportioned between landlord and tenant from the day the tenant vacates.

Next step is to contact each supplier in turn and try to negotiate the best deal you can. Leave it to the company and they will probably apply the most expensive tariff, so it’s up to you to ensure that does not happen.

With acknowledgements to Tim Speed of Shakespeare Martineau, Birmingham

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