What Happens with a Supply Agreement When You Sell the Property?
Last month, we told you about the changes that Neighborhood Energy has experienced over the years – growth, evolution, partnerships and more. We know that you, too, experience change. Sometimes you change by growing and adding to your accounts with us. Sometimes it is due to a sale or other business change, requiring you to remove an account.
A common question among commercial property owners is the status of a third-party supply agreement when a property is sold prior to the end of that third-party agreement. The issue is that you are on the hook and an early termination triggers liquidated damages. This is ubiquitous with all third-party suppliers and it means that the supplier can charge the differential if the supply rate is higher than the current market rate. This is calculated by multiplying the differential with the estimated remaining volume. That, coupled with the cost of the exercise of the early termination, equals the liquidated damages total. There are suppliers that walk away if the supply rate is lower than the current market, but most will charge the allowed administration fee.
As an example, property XYZ LLC sells in March 2020. The third-party rate for 12 months is $0.1017/kWh with a monthly consumption average of 52,000 kWhs. The current market rate for the remaining 7 months is $0.0900, so the early termination differential is $0.0117/kWh. This is multiplied by the remaining estimated consumption of 364,000 kWhs. The rate difference charge is $4,259, plus an administration fee of about $1,000, equaling $5,259. We noted earlier that the easiest transition is to simply sell the XYZ LLC entity to the new owner if a 1031 is not a factor. All contractual obligations, including early termination clause responsibilities, are transferred. The new owner will likely change the name when any agreements come to term. Finally, we are happy to share that no Neighborhood Energy client has paid liquidated damages as a result of our counsel, facilitating reassignments and enrolments by the new owner with the same supplier.
I hope this helps and your questions are welcomed.
Your friendly Neighborhood Energy.