Landlords achieving Net Zero: the importance of reviewing leases before upgrading utility systems

Overview

The dispute in the case of Triplark Ltd v Whale & Ors focused on the replacement of a common boiler system with Heat Interface Units (“HIU”) and a heat network in a residential building. The building's original heating system was based on a central boiler that provided hot water to individual flats. The claimants (Triplark Ltd) (the “Landlord”) sought to update this system by installing HIUs in each flat and a new distribution system that would deliver hot water more efficiently. The proposed new system differed significantly from the old system. Instead of communal boilers heating water for direct supply via pipes to flats, the new system involved pumping hot water from the basement through large pipes to the roof, then distributing it to each flat via ceiling-mounted pipework in the corridors. Each flat was to receive an HIU that would use the circulated hot water to heat cold water for both the radiators and the hot water supply within the flat.

In this case, the High Court decided that the Landlord was not entitled to replace a communal central heating and hot water system pursuant to its obligation to repair as it resulted in increased burden for the tenant (the equipment fell under the tenant’s obligation to repair central heating apparatus specific to their premises). Such works were not contemplated by the parties at the time the lease was entered.

Questions before the court

In this claim, the Landlord sought declarations from the High Court regarding its obligations under the flat leases in view of its proposed heating/hot water upgrades.

The key questions were:

A. Could the Landlord renew, by replacement, the hot water and/or central heating systems, even if the replacement was not identical, as long as the systems provided the same service the Landlord was obliged under the lease to provide?
B. Could the Landlord disconnect hot water/heating apparatus within flats and reconnect it to a new communal system if the Landlord deemed this necessary or advisable for the building's maintenance, safety, and administration?
C. Would the Landlord be in breach of its obligation to supply hot water and heat if it provided a system capable of delivering these services up to the exterior of each flat in a manner that the flat owners can connect as needed?
D. Each flat lease included a covenant requiring tenants to repair “central heating apparatus drain pipes wires and cables” solely applicable to their flats, while the Landlord was obligated to maintain and renew the central heating and hot water apparatus and all ancillary equipment thereto, excluding equipment within the flats. Would the Landlord’s repairing obligation extend to new and different heating and hot water apparatus?

Decision and Key Issues

The Landlord argued that its maintenance obligations justified installing the new system, and that the tenants' repair covenants would extend to the new heat exchangers as "fixtures and additions thereto." The tenants argued that the new system, including apparatus that was solely applicable to the flat, imposed a substantially increased and undue burden, increasing their repair obligations beyond what was originally contemplated when the lease was granted. Following Arnold v Britton [2015] UKSC 36 the Deputy Judge rejected the Landlord’s argument, finding that "fixtures and additions" referred only to items added by the tenants, not to Landlord-installed equipment. The new system introduced an additional heating device, contrary to the single device present when the leases were granted. It was therefore held that this changed the way the lease operated. The additional responsibility of repairing heat exchangers was not contemplated by the parties when entering the lease agreements.

None of the declarations were made. As such, none of the key questions received an affirmative answer by the court, and the Deputy Judge dismissed the claim.

Takeaways:

Given this ruling, it is important to consider future changes that may be required when agreeing and renewing leases.

Factors to consider when contemplating utilities upgrades

In interpreting whether the lease permitted the significant alterations proposed by the Landlord, the court evaluated the necessity, reasonableness and long-term impact of the new heating system on the tenant’s obligations and the overall maintenance of the building. It considered the Landlord’s right to improve the building's infrastructure and the tenant’s right to a reasonable interpretation of their leases, ensuring that any changes would not impose undue burdens on them. The court considered the increased repair obligations and potential disruptions to the tenant’s due to the new system.

Leases must be interpreted in light of modern standards and technological advancements and necessary improvements are permissible if they fall under the maintenance and repair clauses of a lease, even if they introduce new obligations for a tenant. However, the terms of the lease will be interpreted based on the context and expectations at the time of agreement. Significant changes that increase tenant obligations will not be permissible unless covered elsewhere in the lease, or addressed by variation to which both parties must agree. The decision in this case was fact specific, and included specific references to the design of the proposed HIU systems, for example, because each HIU was solely applicable to an individual flat. In this case the Landlord sought to have each tenant maintain its HIU. Question whether a different outcome may have resulted if each tenant’s responsibility started at the connection point beyond the HIU which would result in less of the repair burden shifting to each tenant?

Landlord and tenant participation

Full participation was necessary to ensure the efficiency and cost-effectiveness of the new heating system. The defendants resisted the change, leading to the continuation of the old system for some flats, which complicated the overall heating and hot water supply management in the building. Arguably the worst of all worlds for both parties! The question remains as to whether a Landlord could enforce the change on all tenants or if the tenants could opt-out and retain the old system, in circumstances where a new system would be permissible under the lease. The case highlights the importance of clear communication and negotiation between landlords and tenants in relation to improvements to utility systems. Significant alterations that increase tenants' obligations must be carefully justified and communicated.

Building efficiency and achieving Net Zero

Modernising building systems can lead to significant efficiency gains and cost savings in the long run. Landlords should consider both the immediate disruption and additional tenant burdens in addition to the long-term benefits when planning utility system upgrades. The case demonstrates the importance of reviewing current lease terms and considering the potential for future disputes. In a residential context, flat owners can act in unpredictable ways.

Of additional interest is whether the Government’s planned reforms for the zoning of district heat networks and the grant of compulsory powers to a heat network operator will go as far as to require tenants in zoned areas to take on the burden of maintaining a HIU should a building be supplied by such a network. The devil will be in the detail of whether the final legislation goes far enough to facilitate such a change.

Written by John Danahy (Partner) and Brendon Vyas (Trainee)