Phil Querin Q&A: Submetering and Common Areas

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February 6, 2014

Question: We have some questions regarding common area billing for the water sub-meters that we’re installing. I understand that under certain circumstances, there is an “offset” we can take against the total rent reductions we are required to give residents for the common areas. How does all that work?

Answer: The submetering statutes, ORS 90.531 – 90.539 are complex and confusing. As most owners and managers know who have explored converting to submeters, the concept is relatively simple. But the devil is in the details, i.e. the statutes. The basic concept is that for communities with utilities [e.g. water and sewer] that are buried in the base rent, they may extract those charges from base rent, and pass them through to the residents directly for payment. The “quid pro quo” for this is that the residents' base rent is reduced in a commensurate amount, so in theory, there is no initial net difference to landlord or tenant. But when utilities are increased, it becomes the residents’ immediate responsibility to pay the increased charge – the landlord no longer has to raise the rent via a 90-day notice to recover the increase. Your question specifically pertains to one of the “devilish details’ of this conversion process, i.e. passing through the utility cost for common areas. Specifically, you are referring to subsection (5) of ORS 90.537 (“Conversion of billing method for utility or service charges”). That statute provides that a landlord who has previously included utilities and services in their base rent [called “the rent billing method”] and converts to the “submeter billing method” may unilaterally, and at the same time as the conversion to submetering, begin billing for common areas to a “pro rata billing method” [i.e. where the residents’ cost of the utility is charged and paid separately from the rent in an amount determined by apportioning on a pro rata basis the provider’s charge to the landlord as measured by a master meter]. This common area charge must be included in the 180-day notice to residents that precedes the submeter conversion process. This means that the landlord would charge each resident a prorata portion of the master meter readings attributable to common area costs. Obviously, master meter readings do not distinguish between utility services provided to residents, versus those provided to common areas. For purposes of determining the amount of the offset the landlord should check with the utility provider to find out the cost of its service to the common areas. If the provider cannot provide the landlord with an accurate cost for service to the common areas, the landlord “shall assume the cost of serving the common areas to be 20 percent of the total cost billed.” Note: Only if the landlord continues use the rent billing method for the cost of utilities to the common areas may the landlord may obtain an offset against the total rent reduction given to residents. This is because if the common area utility cost is still buried inside the base rent. It would be unfair to the landlord to require a dollar-for-dollar rent reduction for all utilities, since those attributed to the common areas are not passed directly through to the tenants for separate payment. In other words, the right of offset “…is not available if the landlord chooses to bill for the common areas using the pro rata method.” If the cost of the utility service to the common area is apportioned on a prorate basis and passed through to the residents, there will be no need for offset against the rent reduction as a part of the conversion to submeters. In those cases, the landlord may only apportion the common area utility cost on a prorata basis. For purposes of determining the pro rata charge per resident, ORS 90.534 (“Allocated charges for utility or service provided directly to space or common area”) clarifies the protocol to be followed: • A utility charge that is assessed to residents on a pro rata basis must be allocated among them “…by a method that reasonably apportions the cost among the affected tenants and that is described in the rental agreement.” • Methods that reasonably apportion the cost among the residents include, but are not limited to, methods that divide the cost based on: o The number of occupied spaces in the facility; o The number of residents or occupants in the home compared with the number of residents or occupants in the facility, if there is a correlation with consumption of the utility or service; or o The square footage in each home compared with the total square footage of occupied homes in the facility, if there is a correlation with consumption of the utility or service. • A utility or service charge to be assessed to a resident for a common area must be described in the written rental agreement separately and distinctly from the utility or service charge for the tenant’s space. • A landlord may not: o Bill or collect more money from residents for utilities or services than the provider charges the landlord; o Increase the utility or service charge to a resident by adding any costs of the landlord, such as handling or administrative charges. See, I said the devil was in the details! ~PCQ