New heat supply regulations may catch out unsuspecting landlords – what they need to know

Given the terminology used both in the title of the Regulations and their text, it is easy to see why landlords did not immediately pick up that the Regulations affect them, but subsequent government guidance has identified shopping centres, multi-let office buildings, university halls of residence, and sublet restaurant or fitness centre space in hotels as just some of many situations where the landlord might be the heat supplier and the tenant the final customer. To obfuscate the true import of the Regulations yet further, even “heat” is misleading as it is defined so as to include the supply of heating, cooling, or hot water, greatly extending the range of the Regulations.

We are where we are, though, and wherever the Regulations do bite, three distinct obligations are triggered. We examine and summarise each of them in turn.

Notification

The heating supplier, for which will be the landlord, must notify the National Measurement & Regulation Office that it is a heating supplier and, at the same time supply not only basic details about itself, the property in question, and the final customers to which it supplies “heat”, but also a considerable amount of technical information about the heating system that supplies it. Notification by email is preferred, and the NMRO has created a template form for suppliers to complete, the reading of which merely emphasises the amount of information required.

Indeed, such is the level of knowledge required by the heating supplier to enable it to complete the form that the deadline for doing so has been extended, and compliance with this obligation is now no longer required until 31 December 2015, and even that date may prove to be over ambitious. Our view is that, in due course, commercial Energy Performance Certificate assessors will get themselves trained up to become the advisors of choice for these new Regulations.

Duty to install meters and/or other equipment

While the Regulations refer separately to “district heat networks” (one heating system supplying heat to a number of different buildings, for instance on an industrial estate or business park), and “communal heating systems” (a central system supplying heat to a multi-occupied building, such as a shopping centre), the important distinction is between those that supply one final customer (obviously not possible in the case of a shopping centre) and those that supply more than one final customer. They apply equally, therefore, to a supply from a district heat network to a multi-let building (but not a single occupancy building on the same estate) and from a communal heating system.

For the sake of completeness, where a district heat network supplies heat to a single occupancy building, the heat supplier was required to install a meter where the supply enters the building by 18 December 2014, so some landlords may already inadvertently be in breach of the Regulations.

For multi-occupied buildings, meters have to be installed where the supply enters each unit occupied by a final customer by 31 December 2016 where it is cost effective and technically feasible to do so. The meters must measure the heat supplied accurately, and memorise and display their readings.

Schedule 1 to the Regulations sets out the complicated methodology for assessing whether or not meters are cost effective or technically feasible, which confirms our view that specialists will have to train themselves up and step in to help landlords. As part of the notification process referred to above, the outcome of this assessment needs to be included on the notification form to be submitted to NMRO, which probably explains the extension of the deadline for notification.

If meters are found not to be cost effective or technically feasible (the assessment has to be re-done every four years), then heat cost allocators have to be installed instead but, again, only where it is cost effective and technically feasible to do so.

Whatever is installed, or even if neither measurement option is cost effective or technically feasible, temperature control devices and/or individual thermostatic radiator valves must be installed, the purpose of which is to enable each final customer to control its heat consumption, which brings us on to the third obligation.

Billing

This is the real sting in the tail for landlords. The Regulations provide that each final customer must receive accurate information at least once per year, and more frequently if electronic billing is adopted, about the amount of heat supplied to its unit. More importantly for landlords, they also provide that a final customer cannot be charged for more heat than it actually consumes, which could cause problems for landlords and full recovery where existing leases have fixed percentage contributions or service charge caps.

Imagine a building with 10 tenants, each obliged to pay 10% of the cost of heat supplied by the landlord through a communal heat system. If tenant A’s meter reveals that it has consumed only 8% of the total heat consumed and tenant B’s meter shows 12%, the landlord is prevented by the Regulations from collecting more than 8% from tenant A and by his contractual relationship from collecting more than 10% from tenant B; result, an irrecoverable shortfall.

This can be resolved in new leases either by linking the contribution to the meter reading or by relying on a “fair and proper proportion” contribution formula. The latter is more risky, obviously, as it leaves the door ajar for an argument that for some reason the meter reading does not represent fairness.

Enforcement

Non-compliance with the Regulations attracts criminal sanctions including, ultimately, an unlimited fine. To check compliance, the regulator has powers of entry into buildings with the consent of the occupier and, given that the occupier is not the person liable to comply with them, there is no reason to suppose that consent will not be forthcoming.

Conclusion

If you supply heat, cooling (some but not all air conditioning), or hot water to more than one tenant (final customer) in a building or on an estate, find out what information you need to include on the notification form to NMRO and start investigating the cost and feasibility of installing compliant heat measurement meters or heat cost allocators.