Making sense of a deemed contract as a commercial landlord

During the pandemic, many thousands of tenants have chosen to delay payments of their rent. This is adversely effecting cash flow for landlords, who still have outgoings to pay.

As tenants vacate premises in the future, either through choice at the end of the lease, or being forced due to insolvency, the predicament of landlords will worsen as they are faced with vacant premises.

One of the many considerations for the landlord is the cost of the utilities being supplied to the vacant premises.

If there is no contract for supply in place, gas and electricity will be supplied by way of a deemed contract.

What is a deemed contract?

In the context of electricity, a deemed contract is created by the Electricity Act 1989, 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 (or the owner if the premises are unoccupied) for the supply of electricity.”

There are similar provisions in relation to gas in the Gas Act 1986.

It follows that where a property is vacant there is a deemed contract between the supplier and the landlord.

A landlord may try to argue that the lease has not been disclaimed and as it is still in place, the deemed contract is with the tenant.

However, as can be seen from above, the legislation imposes a liability on the occupier of the premises and if the premises are unoccupied, the owner. It does not on the face of it impose a liability upon a tenant who no longer occupies a premises, irrespective of whether the lease remains in place.

Why are deemed contracts important?

They’re important because deemed contracts are legal and enforceable by energy suppliers in many cases.

And even though the premises are vacant, it is still likely that some electricity will be being consumed, by the alarm system or the security system. Such charges on a deemed contract basis are likely to be higher than on a fixed term contract basis.

There will also be standing charges and other charges which could potentially be substantial. These may include a capacity charge, which is a fee to ensure that there is enough electricity in the system. Such a charge may be based upon historic consumption and not reflect the current requirements.

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What can landlords do?

The best advice for landlords is therefore, as soon as a property becomes vacant or looks like it is becoming vacant, find out who is supplying the utilities to the property and contact them as soon as possible. It may be possible to agree a fixed term contract with the supplier on significantly lower rates than deemed contract rates.

The landlord may also wish to reduce the capacity available to the property helping to reduce the overall cost. The key point is that this should be done as soon as possible. The longer it takes to reach an agreement with the supplier, the higher the overall likely liability under the deemed contract will be.

How can Shakespeare Martineau help?

We can help landlords review their situation and provide advice in relation to vacant properties. We can also help energy supply companies review their portfolio and take appropriate recovery action. Contact Tim Speed or another member of our energy sector team in your local office.

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Tim is a litigator who adopts a robust and practical approach to claims and is valued as a trusted advisor to his clients.

He advises clients on a broad range of commercial disputes with an emphasis on insolvency disputes, disputes within the energy sector, and corporate and banking litigation.

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Published: 22nd July 2021
Area: Commercial Development

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