Landlord and tenant – Service charge – Energy supply – Appellant holding long underleases of apartments in respondent’s building – Charges for energy based on estimates owing to defective meters – Whether appellant liable under terms of underlease to pay charges based on estimates – Whether liable to contribute to fixed and standing charges made by energy supplier in respect of building – Appeal allowed in part
The appellant held long underleases, for terms of 999 years from 2004, of 42 residential apartments in a 33-storey building in London, E14. In addition to 158 residential apartments on the upper floors, there was also a hotel which occupied the lower 12 floors. The appellant’s underlease provided for the payment of a service charge to the respondent, which was the head lessee of the building and the appellant’s landlord. The sums payable included “all electricity gas water telephone and other data supplies and facilities consumed within the Demised Premises”, plus an “apartment energy charge” representing a proportion of the cost of supplying hot and chilled water to the air-conditioning systems in the demised premises “as evidenced by meters installed for the purpose of measuring such proportion”.
Gas, electricity and water were supplied to the building by commercial utility companies, with meters measuring the supplies to the building as a whole as well as consumption in different areas within it, including the hotel, the common parts, the car park and the individual apartments. However, by 2008 it had become apparent that the electricity sub-meters for certain apartments were defective. The supplier began estimating the energy consumption for those apartments by reference to estimates based on energy use in earlier years. From March 2012 to October 2014, so many of the meters were considered to be unreliable that the charges for all of the apartments were based on estimated consumption.
The appellant applied to the first-tier tribunal (FTT), under section 27A of the Landlord and Tenant Act 1985, for a determination of its liability for energy charges for the period from 2008 to 2014. It disputed its liability to pay: (i) energy charges based on estimates; (ii) fixed charges included in the bills from the supplier, including a charge for the availability of electricity to the building, a “reactive” charge based on the efficiency of the equipment in a building, and a standing gas charge; and (iii) a standing charge from the supplier to cover its cost of maintaining its installations in the building and managing the supply. The appellant argued that those sums were not payable since, under the terms of the underlease, it was only liable to pay for electricity that it had actually “consumed”, as evidenced by current meter readings.
The FTT rejected that contention and held that the appellant was liable to pay the sums invoiced to it. The appellant appealed.
Held: The appeal was allowed in part.
(1) The relevant clause in the underlease imposed two different obligations, the first being an obligation to pay the whole cost of direct energy and services consumed within the apartment, and the second requiring payment of a proportion of the cost of gas and electricity consumed by the central plant to generate hot and chilled water for the air-conditioning systems serving the upper floors. The obligation to pay for direct energy was expressed in entirely general terms, with no indication of how the sum payable for energy consumed was to be ascertained. While the sum payable had to be referable to consumption, there was no express requirement that consumption must be measured using any particular method. Although it had been contemplated that, initially at least, the meters installed in the apartments would be the basis of assessment, the parties could not be taken to have assumed that the meters would always provide a reliable measure of consumption. As far as direct energy was concerned, an accurate measurement using the meters in the apartment was not a condition of the leaseholder’s liability to pay for energy consumed. A demand for payment based on an estimate of direct electricity or water consumed in an apartment was capable, in principle, of being a valid demand.
In practice, the underlease anticipated a demand for payment by the supplier of the electricity, gas or water, so the onus was on the supplier to state how much energy had been consumed. While the supplier was likely to base its demand on meter readings, if the meters were believed to be faulty there was nothing in the language of the clause to prohibit the ascertainment of consumption in some other way, including by a genuine estimate. If agreement could not be reached, it would be for the supplier to prove to the satisfaction of a court or tribunal, if necessary, how much energy had been consumed. That question would fall to be proved on the balance of probability. An energy supplier who was put to proof of consumption, but who could not rely on meter readings, might seek to prove that there was an earlier period for which reliable meter readings were available and to base an assessment of consumption on that period. It might be a reasonable inference that, all other things being equal, the amount of energy consumed in one year would be much the same as the amount consumed in a previous year. In that case, the onus would pass to the consumer to show that there was some reason why consumption measured accurately in a previous period could not be relied on as a reliable means of assessing consumption in the period in question.
(2) As a matter of construction of the underlease, the ascertainment of the apartment energy charge required the use of meters. However, the FTT was correct to allow the possibility that exceptionally, where reliable readings were not available, the evidence of consumption on which an apportionment could be based would include evidence of consumption in a previous period. The meters installed in the building were a tool which should not be allowed to assume a disproportionate significance. It would be wrong to make performance of the leaseholder’s substantive obligation to pay for energy referable to the heating and cooling of its own apartment dependent on the reliability of the meters. In any event, even if the obligation to pay the apartment energy charge were to be interpreted as dependent on the availability of accurate metering, the consequence of a malfunction would not be that the leaseholder would be entitled to free energy. To the extent that it made use of the heating and cooling services, it would be obliged to make payment on a quantum meruit basis. In assessing a quantum meruit, it would be necessary to estimate the amount of energy consumed. That requirement pointed towards a limited process of estimation being permissible in ascertaining the apartment energy charge. It followed that a demand for payment pursuant to the underlease, whether for direct electricity or for the apartment energy charge, was not rendered invalid by being based in part on an estimate of consumption.
(3) The appellant was also liable to contribute to the fixed “availability” and “reactive” charges. On the evidence, electricity and gas were supplied inclusive of those charges because of the characteristics of the building and were simply part of the cost of receiving the supply. Having chosen to take a lease in that building, the leaseholders could not avoid part of the necessary cost of procuring an energy supply. There was no evidence that the charges could have been avoided. Accordingly, the cost of electricity and gas recoverable under the underlease properly included an apportioned part of the availability charge, the reactive charge and the gas standing charge.
(4) However, the standing charge was not recoverable from the appellant. The elaborate definition of the apartment energy charge did not include the cost of employing a consultant to read the meters and calculate the energy bills. The cost of the energy itself would be the same whatever the cost of administering the system. Accordingly, the standing charge was not immediately payable under those provisions; it was recoverable only as part of the general service charge and had not yet been properly demanded.
Lina Mattson (instructed by Penningtons Manches LLP) appeared for the appellant; Justin Bates (instructed by King & Wood Mallesons) appeared for the respondent.
Sally Dobson, barrister