Landlords and property agents gathered in London to discuss energy in the service charge at a recent forum hosted by consultants Carbon2018.

Tenant recharging has long been a challenge for commercial landlords and property agents of multi-let buildings. Some buildings, particularly those with older leases, will apportion utility costs on a floor area or fixed percentage basis. With advances in metering, widespread installation and a greater drive for energy efficiency and corporate social responsibility measures, tenants will expect to be charged for actual usage leading to potential disputes.

Peter Forrester, the lead author of the RICS Code of Practice for service charges in commercial property, who spoke during the forum, commented:

“Best practice is for a service charge to reflect a fair and reasonable proportion to ensure that individual occupiers bear an appropriate amount of the total service charge expenditure that reflects availability, benefit and use of services. In the case of common parts, many landlords will simply divide the bill equally between those tenants who use them. The Code states that landlords should not profit from the use of services.”

The RICS Code of Practice is a set of guidelines outlining what is deemed to be best practice, but it cannot override the contractual terms of the lease.  Having said that, the Code has been known to be used in a court of law in cases of negligence.

Landlords and tenants alike will always adopt a position that is most beneficial to them. If you had a building with four tenants, each occupying the same amount of floor space and paying 25% of the energy costs, and sub meters installed reveal one tenant is using 60% of the energy, each party will argue the situation that best suits them. The more energy conscious tenant may quote the Code arguing they should pay a fair and reasonable amount, whereas the high energy user may quote the terms of the lease which states they are to pay 25%. A court of law will always stipulate the contract they have entered into will apply, but is that fair?

As tenants are only liable to pay as far as the lease provides, it is good practice for every lease to have a clause stating that it is subject to legislative changes. There has been a definite shift in the wording of older versus modern leases to incorporate this.

During the forum Forrester commented, “Many energy regulations have been brought in with the best intentions but with little consultation with the industry as to how in practice they will be managed. Take CRC, a tax on organisations, in the case of multi-let buildings the landlord will get taxed and not the tenant using the energy. It is reasonable for the landlord to pass on that cost as it should be the polluter that pays. However the way the whole thing has been put in place creates difficulties in recovering these costs.”

Landlords recharging for energy face huge risks from a credibility perspective as they enter into a financial agreement with the tenants and if they get that wrong what else are they getting wrong? It is therefore vital they ensure all meters are legally compliant with a sound strategy in place.

Leighton Burgess from the National Measurement & Regulation Office (NRMO) joined the forum to discuss the Measuring Instruments Directive (MID) – an EU directive introduced on 30 October 2006. Since this date all new meters must be approved in line with the MID. Meters approved before then can be used until October 2016. Interestingly, there is no certification life for MID approved gas or electricity meters. However electricity meters approved before the directive was implemented do have a defined certification life after which the meters must be replaced.

MID approved meters can be easily identified by their specific markings comprising of the letter ‘M’ and then the year of manufacture. However if a meter is DIN rail mounted the details may be hidden behind a panel. If a landlord is unsure they must check with the manufacturer or distributer.

As Burgess stated, “Either party can request for an approved meter to be independently tested for accuracy, which the NMRO will outsource with no direct charge for testing to any party. However if the meter is proven to be inaccurate there is a cost to the party at fault. The meter will need to be replaced during the testing period.”

However just because a meter is MID approved it does not necessarily mean there is an accurate billing mechanism in place. As Arthur Beattie, Director at Carbon2018, pointed out:

“In our experience MID approved meters are not always installed correctly, which is why an independent meter verification survey is vital to the credibility of any apportionment mechanism.  Equally as important is their ongoing maintenance and commissioning. Meter systems when operated through a Building Management System can be manipulated or reprogrammed very easily without knowledge rendering the data useless for apportionment purposes. Regular checks will pick up on this ensuring a reliable billing system is maintained resulting in an accurate service charge and better landlord tenant relationship.”