East Tower Apartments Limited v No. 1 West India Quay (Residential) Limited [2016]:

Are estimates of energy usage sufficient when calculating tenants’ proportion?

The background

The tenant owned long leases of 42 apartments in the subject property. The leases contained provisions relating to the payment of energy costs by the tenant in the following terms:

The tenant was to pay the whole cost of direct energy and services consumed within the apartment (defined as ‘direct energy’ costs)

In addition, the tenant covenanted to pay a share or proportion of the cost of gas and electricity consumed by central plant for the purposes of air conditioning systems serving upper floors of the building (defined as ‘shared energy’ costs)

The tenant issued a claim in the First-tier Tribunal which was asked to consider three principal issues:

whether the terms of the lease could require the tenant to pay charges based on estimated usage rather than defined metered sums;

whether fixed charge elements of energy costs were payable by the tenant. These charges did not directly relate to energy consumption but instead constituted an ‘availability charge’, guaranteeing a certain level of energy availability to occupants of the building, and a ‘reactive charge’ related to efficiency of supply and metering; and

whether the tenant was liable for a standing charge to Switch2, a third party responsible for reading meters, apportioning charges and preparing energy statements.

The law

Lease terminology in respect of the direct energy costs was generic, and no calculation method was expressed. Each apartment was fitted with a meter and, whilst it was acknowledged that consumption by meter was the most accurate and favourable method, this was not the only way that energy usage could be measured or ascertained. Demands based on estimated consumption could be valid due to a reasonable probability that the figure calculated was either correct or not excessive.

In considering the shared energy costs, meters were relevant in calculating each apartment’s proportion but that, where meter readings were unreliable, calculation of consumption could be based on the actual consumption of a previous period. Guidance from OFGEM allows for reasonable endeavours to be used in estimating energy proportion, a common-sense approach cited by the UT.

The tenant argued that, as the fixed charge elements of the energy costs were not related to energy consumption, they were not payable under the terms of the lease; in particular, as part of the building was used as a hotel, the tenant argued that the charges did not benefit the residential parts.

The Upper Tribunal concluded that, because the building had been designed to receive energy in bulk, the tenant must assume responsibility for part of the charge incurred in receiving such a supply. The bulk supply was not required solely as a result of the hotel’s energy consumption and the tenant had an obligation to contribute.

Further, the ‘reactive charge’ constituted a supply levy to the building. As the tenant had chosen to acquire leases of properties in the building, he must assume the responsibility for such charges.

Switch2’s charges were incurred by the third party in reading energy meters and calculating proportional costs. The company’s charges were demanded under the leases’ energy payment clause, but the lease did not take into account the costs of a third party in supplying these services. Energy costs would remain the same, regardless of who read the meters.

The decision

The Upper Tribunal held that the tenant was liable to pay the fixed charge elements of energy costs. The charges are part of the cost of electricity supplied to tenants, forming part of the permitted resale price according to OFGEM. The charges could not have been avoided and energy supplied was inclusive of the fixed charges.

The tenant was not liable to pay the Switch2 charge; this was only payable as part of the service charge and would only fall due once demanded.

The fact that part of the demand for payment in respect of energy costs was based on an estimate of usage did not affect the decision; the demand was still valid.