If you are converting commercial space to multi-tenant units, you need to understand laws related to utility billing

 

 

Connecticut needs more residential housing. The state has excess underutilized commercial property. As a result, the state has been encouraging conversion of commercial space, hotels and motels to multifamily housing.

However, commercial space and multi-unit residential are wired and piped differently. Hotel and motel circuits are not typically individually metered and a single circuit or pipe may serve more than one newly designed apartment. Similarly, commercial space typically requires major rewiring, new transformers, switchgear and meters. Developers undertaking conversion projects should be aware of state rules related to metering and billing of utility services that will have an impact on their project budgets, timelines and regulatory compliance. 

Generally, under Connecticut law, landlords of multi-unit structures must individually meter each unit for electricity, natural gas and water or include those utilities in fixed rents. Ratio Utility Billing, commonly known as “RUB” billing, is forbidden under Connecticut law. Under this form of billing, the landlord typically bills each tenant directly for the tenant’s “proportionate share” of utilities based on factors it has chosen, such as a unit’s square footage, number of occupants, number of bedrooms and bathrooms, or a combination of these. This method of utility billing is typically included in a provision of the plaintiff’s lease agreements. However, the Connecticut Supreme Court recently ruled that RUB billing for residential multi-unit properties is illegal under Connecticut law. Instead, landlords may either (i) estimate utility costs upfront and recover them as a fixed component of a tenant’s lease payment, (ii) use sub-metering approved by the Public Utilities Regulatory Authority (PURA), or (iii) work with the local electric, water or gas company to install their meters at the facility. Notably, while the Court focused on residential properties, PURA has since interpreted this ruling to implicate both residential and commercial properties. 

There are a variety of trade offs in deciding which approach to pursue which can be project-specific in nature. Obviously, including utilities in the rent under a fixed fee for the entire lease term exposes the landlord to unrecovered utility rate increases or unexpected utility usage (like leaving lights on or appliances running or boosting heat while leaving windows open). Individual metering avoids this risk. Moreover, Connecticut generally prohibits master metering in new multi-unit residential construction. Certain exceptions exist, for example, when renewable energy is generated onsite. Generally, master (i.e., single) metering of commercial properties is disfavored, although special arrangements may apply to large buildings where individual metering of each nonresidential customer may not be cost-effective or may not be physically practical. Moreover, timelines for necessary equipment to upgrade existing wiring may be significant, as lead times to procure equipment such as transformers and metering equipment can take months. 

Sub-metering also contains inherent trade offs. Landlords are permitted to collect for each tenant’s individual usage at the local utility rate, and reasonable administrative fees to pay for the metering and billing of utility service are permitted. Common areas must be separately metered and related utilities paid by the landlord. Some landlords may be able to earn a profit if the electricity can be generated onsite with lower cost renewable generation, such as solar or fuel cells. PURA has strict regulations on sub-metering and has established a rigorous application process where applicants need to provide detailed technical information alongside customer service billing policies and procedures. 

Our firm has helped clients navigate the conversion of a major downtown hotel to residential apartments. We have also assisted in the conversion of other hotel and motel properties as well as former office space to multifamily residences. Developers and landlords undertaking conversion projects are wise to think about utility sub-metering issues early in the process to avoid surprises, unexpected costs and unanticipated delays.

Fred Klein and Kate Boucher are partners at Pullman & Comley with offices in CT, MA, RI and NY.