Hidden Costs in Commercial Leases:
Negotiate Exclusions to Common Area Costs

Net leases (as opposed to gross leases) require the tenant (lessee) to pay to the landlord (lessor) a share of the building's operating costs. The tenant pays a percentage of the operating costs equal to that percentage of the building that the tenant occupies.

It sounds simple. And it is - except for one thing. The definition of the operating costs to be passed through to the tenant is too broad in most standard commercial leases. Absent exclusions to that definition, you, as a tenant, will often pay thousands of dollars too much to your landlord each year.

Before agreeing to net lease terms, insist on clarifying the definition of the operating costs to be passed through to you, the tenant. Each exclusion from pass-through operating costs, agreed to by your landlord, will save you money.

Is your local region in an owner's market (low vacancy rate - high demand) or a renter's market (double digit vacancy rate - low demand)? This market factor plus the tenant's willingness to insist on these exclusions before executing the lease (or moving into the premises) will determine the extent to which the landlord will incorporate some or none of these exclusions into the lease. As you know, nothing ends serious negotiations faster than a tenant moving into a building before the lease negotiations are completed.

Below is a Sample Operating Expense Exclusions Addendum. This sample language can be inserted directly into your client's lease or attached to it as a lease addendum.

If it is added as an addendum, be certain that:

(1) it is incorporated into the lease by reference on the signature page of the lease,
(2) the reference is initialed by each party on that page,
(3) it has a paragraph number in the addendum,
(4) the addendum is signed by each party and
(5) each page of the addendum is initialed by each party.

If you like the following sample document, then please visit our LawVantage.com Digital Legal Documents Library. Our library members can download sample contracts, corporate documents, comments and revisions letters, employee handbooks, and many other legal documents at the click of a mouse.

Sample Operating Expense Exclusions Addendum

Notwithstanding anything to the contrary in the definition of Operating Expenses in the Lease, Operating Expenses shall exclude the following:

(a) Attorneys' fees and other costs and expenses arising from claims, disputes, litigation or arbitration pertaining to Lessor, the Premises or both that do not serve to benefit or preserve benefits enjoyed by Lessee, alone or in common with other tenants of the Premises;

(b) Attorneys' fees, leasing commissions and other costs and expenses incurred in connection with negotiations or disputes with present or prospective tenants or other occupants of the Premises;

(c) Capital expenditures incurred due to Lessor's failure to comply with laws enacted on or before the date the Building's Temporary Certificate of Occupancy was validly issued;

(d) Costs incurred by Lessor with respect to goods and services (including utilities sold and supplied to tenants and occupants of the Premises) to the extent that Lessor is entitled to reimbursement for such costs from other tenants or occupants of the Premises;

(e) Costs incurred by Lessor for the repair of damage to the Building and/or Premises;

(f) Permit, license, inspection and other costs incurred with respect to the installation of tenant improvements made for new tenants in the Premises or incurred in renovating or otherwise improving, decorating, painting or redecorating vacant space for tenants or other occupants of the Premises;

(g) Expenses related to services or other benefits that (i) are unavailable to Lessee in common with other tenants or occupants of the Premises without additional cost or (ii) are available to Lessee for an additional cost, but to another tenant or occupant of the Premises for no additional cost;

(h) Costs incurred by Lessor due to the violation by Lessor or any other tenant of the terms or conditions of any lease of space in the Premises;

(i) Tax penalties incurred as a result of Lessor's negligence, inability or unwillingness to make payments and/or to file any Property Tax or informational returns when due, so long as it is not caused in whole or in part by Lessee's default hereunder;

(j) Ground lease payments, principal payments, interest, points, fees on debt or amortization on any mortgage or mortgages or any other financing liens encumbering the Premises;

(k) Any compensation paid to clerks, attendants or other persons in commercial concessions operated by Lessor in the Premises, but only to the extent that consumers rather than Lessee are charged for such services rendered;

(l) All items and services for which Lessee or any other tenant in the Premises reimburses Lessor or which Lessor provides selectively to one or more tenants (other than Lessee) without reimbursement;

(m) Costs of advertising and promoting the Premises or its owner, and costs of signs in or on the Premises except to the extent the signs identify Lessee rather than the owner or other tenants of the Premises;

(n) Lessor's charitable or political contributions and related costs;

(o) Electric power costs for which any tenant directly contracts with a local utility or service;

(p) Cost of repairs to the Premises or the improvements constructed in the Premises to the extent such costs are paid or reimbursed pursuant to warranties;

(q) Administrative fees, management fees, building management office rental, profit and overhead; and

(r) Overhead and profit increments paid to Lessor or to Lessor's subsidiaries or affiliates for goods or services in the Premises to the extent the they exceed the costs of such services rendered by unaffiliated third parties on the competitive basis of cost and quality.

(s) Depreciation on the Building other than on carpeting in multi-tenant floor public corridors and common areas;

(t) Property taxes

[IMPORTANT NOTE: The terms Premises and Building as used in the Addendum must be consistent with the definitions used in the actual lease. If the term Premises is defined in the actual lease as only the space leased by your client, then a different, more encompassing term such as Property may be needed in the Addendum.

[IMPORTANT NOTE: Property taxes (SEE (t) ABOVE) are generally covered by separate tax provisions of the lease] .