Summary and implications

With a rise in the number of insolvent tenants and tenants vacating premises it is important for owners to minimise the costs of their portfolios and understand the extent of their liability to utility suppliers and any impact on their CRC supply so as to avoid being left with substantial charges. Property owners are often served with a claim from a utility supplier who has not been able to recover outstanding sums from a previous occupier.

The Office of Gas and Electricity Markets (Ofgem) issued a letter of guidance on 24 June 2010, “Statement of Deemed Contracts” which states gas and/or electricity would need to be consumed in order for a deemed contract to arise between a licensed supplier and the occupier/owner of the premises. This is however a general and non-binding view and the legal position will depend on the individual circumstances of each case.

Owners should:

  • Ascertain what arrangements have been made between a tenant and supplier prior to the tenant vacating the premises.
  • Contact utility suppliers to negotiate a new contract where a continued supply of power is required.
  • Review the utility contract terms to provide for a low supply or a supplier with no standing connection fees where vacant.
  • Consider the CRC implications of energy consumed in a vacant unit.

Interpretation of the Utilities Act 2000

Under paragraph 3 of Schedule 6 of the Utilities Act 2000 a deemed contract is defined as follows:

“Where an electricity supplier supplies electricity to any premises otherwise than in pursuance of a contract, the supplier shall be deemed to have contracted with the occupier (or the owner if the premises are unoccupied) for the supply of electricity as from the time when he began so as to supply electricity.”

  • If the premises are subject to a lease then the premises are not “unoccupied”.
  • If an occupier company:
  1. is in administration; or
  2. vacated the premises; or
  3. the lease of the premises has been surrendered; or
  4. forfeited,

the contract between the occupier and supplier remains in place unless the occupier has taken steps to terminate the contract or the supplier has terminated the contract.

  • If the occupier company goes into liquidation, once the lease is disclaimed a deemed contract may arise between the owner of the premises and the utility supplier as the premises will be “unoccupied”.

Ofgem guidance

Ofgem have previously sought to clarify the general principles of a deemed contract relationship in their letter of guidance dated 26 October 2009. It established that a deemed contract is likely to exist upon termination of the original contract (by either the supplier or the customer) or where the contract expires by passage of time and the supplier continues to supply services to the premises. A deemed 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.

The fact that Ofgem have issued their recent letter of 24 June 2010 referred to above would appear to indicate there are still grey areas and a lack of clarity as to when a “deemed contract” arises. Ofgem are carrying out a general marketing monitoring exercise in respect of charges applied to deemed contracts.

No usage, no deemed contract?

An invoice from a utility supplier is usually split into standing charges (which are charges made for having the benefit of connection/supply pipes to the premises) and consumption charges. If the statement by Ofgem is to apply then unless an owner/occupier has actually consumed energy then a deemed contract cannot have arisen and a claim for standing charges only would not suffice to create a deemed contract.

Carbon Reduction Commitment Energy Efficiency Scheme

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

In order to assess where the CRC responsibility lies, the counterparty to the original energy bill will need to be identified. If this is the owner who bulk buys the energy on behalf of the occupiers of a building then the owner will be responsible for that supply for CRC purposes. 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.

Deemed contracts and CRC supply rules are complicated and further legal advice should be sought should these issues arise.

Management Action

  • The supplier is under a statutory duty to provide the owner with written details of the principal terms of the supply contract. These should be requested.
  • If an occupier is due to vacate, ascertain what utility services are in place and what action has been taken by the occupier in respect of such supply. Request a copy of the occupier’s contract with the supplier and check the termination provisions.
  • Contact utility suppliers 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 per cent, than contracts of a longer term given the short term pricing policies.
  • Costs for disconnecting and reconnecting (which usually involves 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.
  • If payment has not been received for 28 days, the supplier must give not less than seven days’ notice in writing to the relevant party to disconnect the premises. However, the supplier cannot disconnect the premises in respect of any amount which is genuinely in dispute.
  • Where there is any claim for a deemed supply this should be reviewed carefully and advice should be taken, ensuring that no charges are paid which remain the responsibility of the previous occupier.