Green guru: Communal heating
When installing a communal heating system social landlords must follow these steps to avoid getting their fingers burned, says Chris Paul
Saving money, being more energy efficient and making better use of space - these are all factors which are encouraging housing developers to install communal heating systems. But before social landlords opt for communal heating, it’s crucial to understand the legal framework around how to charge tenants for heat if the scheme is to be a long-term success.
Larger developments can attract energy service companies that are willing to fund the necessary upfront capital investment in return for an exclusive right to sell heat to residents. These arrangements are underpinned by complex concession agreements that clarify the ESCOs’ obligations, the form of customer supply agreement and the heat tariffs. ESCOs will consider a number of factors in connection with any commercial offer, including the likely heat demand and the proposed specification of the plant and network - it is important that they are involved at an early stage.
Under these arrangements, the ESCO will generally enter into a heat supply agreement with each resident. These agreements vary in form and content - some are written in plain English, but many are lengthy and contractual. They need to be carefully reviewed to ensure that they are sufficiently clear and provide adequate protection for residents. This includes clarity on the tariff structure, the payment options, the ability to dispute bills or meter readings and the ESCO’s ability to suspend or terminate the supply of heat. It is also important that landlords consider the wording of their tenancy agreements and leases, ensuring a consistent approach.
Landlord and Tenant Act 1985
The impact of landlord and tenant legislation needs to be considered at an early stage. Section 11 and sections 18 to 20 of the act are of particular application and need to be addressed by landlords prior to procuring providers and finalising tariff structures.
Section 20 of the act requires a landlord to consult leaseholders, tenants and recognised residents’ associations before entering into a qualifying long-term agreement. A QLTA is any agreement entered into between the landlord and a third party (such as an ESCO or service provider), which lasts more than 12 months and pursuant to which a resident’s contribution to the cost arising under the agreement is more than £100 per year.
In the event that a QLTA is entered into before any tenancy agreements or leases (or contracts for sale) are in place, there is a five-year exemption from the obligation to consult. This is useful for short-term outsourced services, but is more difficult to fit with a long-term concession agreement (which can be up to 25 years in duration).
It is important to consider the statutory obligations set out in section 11 of the act when reviewing heat tariff structures. This implies the landlord shall ‘keep in repair and proper working order the installations in the dwelling house for space heating and heating water’ - and this maintenance cost is deemed to be included in the rent. This needs to be addressed in any tariff structure, so that the charges relating to the landlord’s maintenance obligations are separately identified and charged to the landlord (rather than the tenant as part of the heat charges).
Setting the tariff
Under ESCO concessions, costs are often split between standing charges (based on operation and maintenance costs) and usage charges (based on the amount of heat used in each accounting period) - with a unit price for heat. These pricing models vary from deal to deal, and it is critical that landlords understand the proposed tariffs and the cost implications for their tenants.
Chris Paul is a partner at Trowers & Hamlins LLP