The administration of a tenant is seldom a welcome scenario for any commercial landlord. This is particularly so when a tenant ceases to trade from the premises, leaving an unoccupied (and unprofitable) unit.
Who pays for the utilities?
Landlords may often wish to see the tenancy continue notwithstanding the tenant's insolvency. One reason for that is a desire to continue the tenant's liability under the lease for the costs of utilities.
Electricity may be required to power an alarm, or to operate security doors. Gas may be required to heat the premises and avoid the risk of frozen and burst pipes.
Landlords need to balance the continuing need for utility supplies with concern for how the costs will be met, particularly where the administrator seeks to avoid liability and the premises are producing no rental income.
Utility suppliers may be keen to cut supplies
Administrators are often reluctant to assume personal responsibility for these costs.
Utility suppliers will seek to avoid providing services for which they have no reasonable expectation of being paid. Utility suppliers now have enhanced legal powers to help them avoid that situation.
Landlords may be faced with loss of supply
The law that applies to utility contracts involving companies in administration changed in 2015. Amongst the changes, provision was made for contracts entered into from 1 October 2015 between companies and the suppliers of gas, electricity, water and communication services.
In terms of Schedule B1 to the Insolvency Act 1986, no legal process may be instituted or continued against a company in administration, or the property of the company, except with the consent of the administrator or with the permission of the Court. This is very broad and could be seen to encompass termination of rights under contracts with the company.
However a recent change brought into the insolvency legislation now means that utilities companies have the right to terminate supply contracts and supplies in certain circumstances under contracts entered into after 1 October 2015 without necessarily needing consent from either the tenant's administrators or the court.
In particular, utilities contracts can be terminated if any charges incurred after the date that the tenant fell into administration are not paid within 28 days of them falling due.
A supplier can also terminate the supply of services if the administrator does not personally guarantee the payment of any charges in respect of the continuation of the supply within 14 days of notice being given by the supplier.
That still does not, however, entitle the supplier to take entry to the unit and remove the physical means of supply without either seeking the administrators' consent, or applying to court for an order permitting the removal of the physical supply.
Landlords' choices if supplies are threatened
Landlords may understandably be concerned by this. The disconnection of the utilities gives rise to a number of issues, including the costs of reconnection, issues with the securing the premises and possible breaches of any insurance contracts that the landlord may have in place.
In these circumstances, landlords may consider assuming responsibility for the future utility liabilities. Such costs may be comparatively low if the premises are unoccupied and unused, but landlords need to ensure any such decision is carefully considered in light of the pitfalls.
For example, landlords should ensure that liability is assumed for future utilities costs only, to avoid assumption of responsibility for any arrears accrued by the tenant prior to administration.
Landlords may also need to be careful to ensure that entering into a contract with the utilities supplier directly does not amount to an acceptance that the lease has come to an end if, for any reason, the landlord wishes to reserve its position on continuation of the lease.
Given the potential risk of exposure, landlords should seek advice in order to ensure that their wider interests are protected in the administration before assuming liability for the cost of utilities.
If you would like more information on any of these issues, please speak to your usual Brodies' contact.
Contributor
Legal Director
