Lights out: what the energy crisis means for landlords and tenants

Posted: 03/01/2023

In early October, National Grid, which oversees electricity supply in Great Britain, published its Winter Outlook Report. It set out a response to the pending escalation of the energy crisis in Europe and suggests there could be planned blackouts conducted across the country to save energy.

This could mean households and businesses may be without power for “pre-defined periods” to help manage the security and integrity of the electricity system. Coupled with the soaring energy prices during the course of this year, we can be in no doubt that Great Britain is in the midst of an energy crisis, and facing a bleak (and potentially dark) winter.

Here, we examine issues which landlords and tenants may consider as a result of the planned blackouts and the energy crisis.

Keep-open covenants

It is common, particularly in the retail sector, for leases to contain a covenant by the tenant to keep premises open for trade during certain hours. Any blackout situation leading to an absence of power to operate the premises may cause a breach of this covenant. A tenant will need to consider the force majeure provisions in the lease which should protect its position. When negotiating a lease, a tenant should ensure that any such provisions cover a blackout situation such as a force majeure event.

The energy crisis has led to some tenants reducing opening hours across their portfolios in an attempt to cut their energy costs. Tenants should liaise closely with landlords to consider variations to the keep-open covenant, or a side agreement could be used where these alternative arrangements are likely to be temporary.

Landlords may seek to enforce such breaches of covenant by way of an injunction. However, given the presence of the energy crisis, along with the skyrocketing costs of supplies generally, landlords may be more inclined to negotiate a compromise with the tenant which may benefit both parties in the long term.

Landlords will need to check for any obligations to enforce keep-open covenants against other tenants in, for example, a shopping centre, as these may be impossible in the event of a blackout. 

Services and outgoings – payment and provision

In the current energy crisis, both parties will look to keep down their costs of outgoings, which includes utilities.

Under the terms of most leases, it is often the tenants who are obliged to meet the costs of outgoings, either by setting up a supply contract with payments going directly to a supplier, or by paying outgoings costs to the landlord as part of an inclusive rent. The tenant may also be liable for utilities payments under a service charge to meet the landlord’s service costs.

When paying directly to a supplier, a tenant has more control over the level of payments and could even reduce costs when negotiating supply contracts. However, where the supply is set up by the landlord, tenants are at the mercy of the landlord and its preferred energy supplier.

With tenants paying the cost of landlord-controlled outgoings, landlords may be less incentivised to renegotiate with suppliers to reduce energy costs.

Tenants should carefully consider the terms of the lease in respect of payments for services and service charge, as the landlord may seek to enforce a breach of these provisions.

Blackouts will cause serious issues for landlords where there are mandatory obligations in the lease to maintain and provide services. The force majeure provisions may provide some protection so these will need to be scrutinised and, if not sufficient, may require variation.

Where a landlord wishes to cut service costs, it will need to examine the terms of any updated services plan to ensure it is not relinquishing services which it may be a mandatory requirement to provide under the terms of the lease.

Rent

Following Covid lockdowns, tenants are struggling to rebuild their businesses and the energy crisis may tip some over the edge into insolvency. Blackouts will cause more problems by disrupting trade.

For leases including turnover rents, the parties should address the provisions to ensure periods of closure are dealt with effectively.

For landlords looking to maintain steady income and assist in helping tenants’ businesses stay afloat, parties may look to negotiate periods of rent reduction until tenants get back on their feet.

Repair

Both parties should keep a close eye on the state of premises and common parts during the energy crisis. In efforts to cut back, carrying out standard repairs may fall by the wayside and risk premises and common parts declining into disrepair more quickly and easily, leading to breaches of covenant by either party. Blackout periods are likely to increase the risk of additional damage to premises and/or plant and equipment.

Landlords and tenants may lower the costs of repairs by seeking out cheaper materials and/or plant and equipment while still ensuring that repair obligations are sufficiently met. They may also consider undertaking a technical review of premises to make sure that the impact of periodic electricity shutdowns is mitigated.

Rights

Periods of blackout may affect a tenant’s right of access and parties’ mutual rights to connect into and use services. Where any such rights are material to a tenant’s use of its premises and are extinguished, even temporarily, this may cause landlords to breach the terms of the lease and – in the worst cases – amount to a derogation from grant.

Where premises form part of a large multi-let building or estate with extensive common parts including electrically powered equipment such as lifts, escalators and security systems, a blackout could significantly affect a tenant’s rights of access.

Similarly, a blackout situation is likely to adversely affect the use of, and connection into, utilities, potentially leading to breaches of both parties’ obligations in allowing the other party to use those services.

Landlords should consider whether back-up operations are required and ensure these are communicated to tenants, as well as stress-testing current systems to ensure they can cope. Parties should also consider the terms of any force majeure clauses to check for protection in such circumstances.

A word on force majeure clauses

Given that the warnings about potential blackouts are relatively common knowledge, it raises the question whether proposed blackouts would constitute a foreseeable event for the purposes of a force majeure clause.

Parties relying on such clauses for the purposes of protection from breaches caused by a blackout should check to ensure the force majeure does not exclude foreseeable or foreseen events, as can often be the case.

In addition, parties should scrutinise the mitigation provisions of the force majeure clause to ensure they are not too onerous or prescriptive as to what is required of the parties.

Some good news on the horizon

The past five years have seen a significant increase in the number of battery storage schemes of varying sizes in an attempt to help with the security of the grid and relieve capacity issues.

Indeed, there appears to be an increase in the weight being attached to the benefits of schemes which help with energy security. This was epitomised in the recent decision by the Planning Inspectorate to allow an appeal against a refusal by Selby District Council for the development of a large battery storage facility on green belt land (despite the parties agreeing that, having regard to the National Planning Policy Framework, the proposal was an inappropriate development). Schemes such as these will aid efforts to stabilise the grid and hopefully negate the need for proposed power outages. Hopefully, our winters will not be so dark after all.

This article was published in Estates Gazette in December 2022. 

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