If you’re a commercial tenant, it is good to check in on a few key aspects of your lease to protect yourself in the year ahead. The biggest source of confusion for many business owners is the charges incurred for common area expenses (CAM) or operating expenses (OPEX). Specifically, there is confusion around landlord and tenant payment obligations, timing, rights and exclusions.
That said, here are some important CAM/OPEX clarifications and additions to consider when evaluating your lease in 2023.
1. Obligation of the Landlord
Ideally, the lease should have an obligation of the landlord to provide a reconciliation of the actual CAM or OPEX and the tenant’s actual share against the estimated payments made by tenant, with a refund to the tenant if the tenant has overpaid. Require the landlord to provide this reconciliation to the tenant within some reasonable time period (120 days after year end) for the tenant to review and ensure the tenant has not been overcharged.
2. Audit Rights
Upon receipt of the reconciliation statement, the tenant should have the right to audit the books and records of the landlord with respect to CAM or OPEX to ensure the tenant has not been overcharged. The landlord will likely require any auditor engaged to not be paid on a contingent basis. Also, if the tenant’s share of CAM or OPEX was overstated by 3-5%, specify that the landlord should pay for the cost of the audit.
3. Limitations on the Right of Landlord to Bill Tenant for CAM or OPEX
It can happen where the landlord fails to include some expense(s) in CAM or OPEX within the applicable calendar year. For example, FBFK had a client that received a bill for its share of prior years’ CAM or OPEX from several years earlier. This was because there was nothing in the lease that prevented it. Our recommendation is to ask the landlord for a limitation on time allotted for back-billing for previously unbilled expenses. Generally, a landlord will not agree to the end of the calendar year in which the expenses was incurred, but landlords have agreed from anywhere from six months after the end of the applicable calendar year to two years. Regardless, if the term of the lease is of any substantial period (five-plus years), try to get some kind of limitation.
4. Exclusions from CAM/OPEX
Generally, the lease will provide that CAM/OPEX include all costs and expenses incurred by the landlord in operating, maintaining and managing the common area/building. However, there are a number of exclusions to CAM/OPEX that we suggest, and some landlords are more receptive to the exclusions than others. These include:
- Capital improvements (except as may reduce OPEX, and then amortized over the useful life);
- Leasing commissions;
- Renovating or otherwise improving vacant space;
- Administrative costs/overhead of the landlord in excess of five percent of the total cost of operating, maintaining and managing the common area;
- Salaries and benefits above the grade of property manager (all allowable salaries and benefits shall be apportioned by the percentage of time devoted to the premises versus other properties) and/or management fees to the property management company managing the property in excess of four percent of gross rents of the property;
- Legal fees for preparation of leases or rents payable with respect to any leasing office of the landlord/property manager;
- Expenses incurred due to the negligence or willful misconduct of the landlord or any occupant, or their respective agents or employees;
- Interest, late charges or penalties incurred as a result of the landlord’s failure to pay bills timely;
- Any costs, fees, fines or penalties, or interest thereon, incurred due to violations by the landlord or any occupant of any governmental law, ordinance, code, rule or regulation;
- All other costs to comply with the requirements of any laws, codes or other governmental regulations, including, without limitation, the Americans Disabilities Acts, in place as of the date of the lease outside of the premises;
- Court costs or legal fees incurred to enforce obligations of other tenants under leases;
- Reserves for anticipated future expenses;
- Amounts paid to entities related to the landlord in excess of the cost of such services from any competitive source;
- Rent or other charges paid by the landlord pursuant to any ground or master lease; and
- Costs and expenses resulting from a breach by the landlord of its obligations under the lease or any other lease for portions of the property.
The bottom line
All too often commercial tenants accept their lease agreements freely and without any objections. However, a one-time review of the lease can lead to years of savings for a small business. Take action now.
Publisher’s Note: This content is premium subscriber thought leadership and is published outside of our paywall.