Supply agreement for combined heat and power systems

Supply agreement for combined heat and power systems


Author: Melissa Barker

It is a common feature with new developments that combined heat and power systems may be included.

These supply heat, hot water, cold water, electricity and other utilities to individual properties on a site or across neighbourhood sites but from one centralised plant.

If these are large enough, they can require long term utility supply operation and an agreement with a specific supplier. Developers must be careful about entering into supply contracts for combined heat and power systems in case they fall foul of the consultation provisions contained in section 20 of the Landlord and Tenant Act 1985.

This section requires a landlord to consult with all tenants:

  • before any agreement is entered into which is for more than 12 months; and
  • where any individual tenant is likely to contribute more than £100 per year.

Reference to 'all tenants' includes those where there is an exchange in place but no lease has been granted and registered providers in relation to the affordable leases if a contract has been exchanged.

If the correct consultation procedure is not followed, the developer as landlord risks being unable to recover more than £100 per tenant per year in relation to that particular supply contract.

The situation is eased as there is an exclusion in the statute allowing for agreements to be put in place before there are any exchanges of contracts for the grant of plot leases - including an exchange of contracts with the registered provider - where the agreement is for less than five years.

This scenario has been further eased by the decision in the recent case of (1) BDW Trading Limited (2) Comet Square Phase 2 Block Management Co Ltd v South Anglia Housing Limited (July 2013).  In this case a 25 year supply contract was put in place before any exchange of agreements for lease and the Court held that the consultation provisions could not apply because the building had not yet been constructed and there were no tenants in place to consult with.

In order to take advantage of the statutory exclusion, a supply agreement must be entered into early. This is particularly important bearing in mind the timing for any affordable housing sale. Be aware that any renewal or renegotiation of the agreement following the expiry of the initial term, will require consultation to take place. This could affect a developer where the development is particularly large or it does not intend to sell on the reversion and so it will remain responsible for the provision of the services.

This exemption, however, will not assist where the developer has exchanged contracts in relation to any sales. In this scenario the developer will need to consult with the tenants or apply for a dispensation. We do not propose to set out the consultation requirements in this article, as they are very detailed, but we can assist should you need to undertake a consultation.

Alternatively a developer can apply to the leasehold valuation tribunal for dispensation from complying with the consultation requirements. Dispensation is more likely to be granted if this is made before the supply contract is entered into but an application can be made retrospectively. There would need to be a particular reason for dispensation to be granted.

An example of where dispensation has been granted is the 2012 case of Urban Splash (Park Hill) Limited v Great Places Housing Association. This case concerned a proposed 25-year agreement for the supply of communal heating and hot water to flats contained in a former council estate which was in the process of being redeveloped by Urban Splash.

Urban Splash was due to enter into a contract with an energy supplier which owned the existing power infrastructure and therefore was the only possible energy provider. Urban Splash applied for dispensation on the basis that it was impossible to comply with the consultation requirements because the proposed supplier was the only possible supplier and without adequate heating systems in place the development could not proceed.