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When you are negotiating your commercial lease for office space, retail space, or industrial space, you want to ensure you are paying fair market rent and that your landlord is only passing legitimate costs onto you as part of your contribution to operating costs. Many landlords and property owners are honest and conduct business on the up and up, but plenty engage in shady business practices without regard to moral, ethical, or legal standards. You can be sure that even the honest landlords will want to pass as many operating expenses onto you as possible, so it is important for you to understand which ones you should not have to pay. This guide offers a comprehensive list of operating cost exclusions your landlord should exclude from your commercial lease.
It is fair to assume operating expense payments will increase a little each year – that is how it normally goes. Yet, landlords have control over some of these expenses. You need to ensure these "controllable" expenses are capped at a reasonable percentage each year. Examples of controllable expenses include pretty much everything except snow removal services, insurance, real estate taxes, and utilities. While it can be difficult for smaller tenants, a cap on controllable expenses of 5% each year can sometimes be achieved.
Your landlord should not try to charge you for any services you receive and pay for outside of your operating expense payments. For example, you have a business in a strip mall and each tenant must acquire their own internet service. You have a contract with your local carrier and pay them each month. Your landlord cannot try to charge you for internet service that you already paid for.
If an event happens in which your landlord receives payment for loss from an insurance company, another tenant, or any other entity, he cannot also pass the cost of these items onto you as operating costs. For example, a nasty thunderstorm passes through and causes irreparable damage to the roof of the building where you rent. Your landlord files an insurance claim and replaces the roof. The insurance company pays for the roof, so your landlord cannot pass any costs onto you.
If your landlord or another tenant breaks any laws, regulations, or city ordinances, or violates any building code violations which result in additional expenses and fines, he or she cannot pass those costs to you. For example, one of your neighbors owns a restaurant. After a visit from the city, the restaurant owner and property owner get fines for a variety of health code violations. Your landlord cannot pass a portion of these fines and cost to make improvements onto you.
Your landlord might have one or more mortgages or other debt instruments on the property you rent. If your landlord gets penalized late fees, percentage point penalties, interest charges, it is not your fault and that should not be passed along as a legit operating cost. When your landlord cannot pay his bills on time or makes bad financial decisions which cost him money, he cannot pass those fees onto you as part of operating costs.
Your landlord has a wide array of expenses involved with acquiring new tenants and keeping existing tenants. Some examples include marketing expenses for signage, web ads, mailers, and any other advertising costs and negotiating costs paid to a leasing agent (real estate broker fees) or attorney for preparation of letters, memos, leases, subleases, and more. This is a cost of doing business for your landlord; he should not pass these expenses to you.
When new tenants move into a building, property owners must pay permit fees, licensing fees, and inspection costs when they make improvements or do build-outs. Landlords must also incur these expenses when renovating or improving a space for current tenants. These costs are not part of operating expenses or common area maintenance and should not be passed to you.
Administered by the United States Green Building Council (USGBC), LEED is the system used to rate buildings based on the extent of their sustainability. If your landlord seeks a LEED certification, he or she cannot charge you for those fees. Yet, he or she can include costs to maintain a LEED certification or something similar in Operating Costs.
Your landlord cannot charge you for expenses which arise from benefits or services other tenants receive for free. This exclusion speaks to equality among tenants especially as it pertains to benefits related to common area maintenance. Each tenant who reaps the benefits of a particular service or item must contribute equitably. If the benefit or service is free for one, it must be free for all.
Consider the following example. You own the largest and most profitable business in a strip mall. The landlord finally finds tenants for the other three commercial spaces. You have been paying all the costs for trash services, so your landlord decides to leave it as is. The new tenants get the benefit of using the dumpsters in the rear of the strip mall without payment, while you continue to foot the bill.
If your landlord brings a lawsuit against another party or gets sued, he or she cannot pass any judgment amounts, attorney fees, court costs, or any expense arising from claims to you. This includes any potential or actual litigation, medication, or arbitration related to other tenants or visitors on the property.
If hazardous materials exist in your space prior to your lease, your landlord should not charge you to comply with ordinances related to waste removal. All costs to remove, remedy, or treat mold, pests, asbestos, or other hazardous material, are your landlord's responsibility.
Some unscrupulous landlords will try to pass on oddball miscellaneous costs which are in no way related to your lease. Some examples include charitable contributions to local and national organizations and political contributions to local, state, and national campaigns. Another common miscellaneous cost landlords try to charge tenants is for artwork and decoration. Much like the cost of improving a space for a new tenant should not be included as operating expenses, decorating items, paint, and artwork should not be included.
When a landlord has a big replacement cost, such as a new roof or parking lot, that is a capital cost. While the landlord is within their right to charge you for your share of the improvement, it should be amortized over the useful life of the installment (example: if a new roof will last 15 years, then you should pay your share each year for the 15 years). Capital costs are always spread out, and operating costs are charged in the year they occur.
Be very careful with this clause. It allows the landlord to pass along operating costs when they have vacancies. Usually it is worded such that if the occupancy dips to 95% then the landlord can charge operating costs as if the building is fully occupied.
In other words, if your building is fully occupied and a tenant who occupies 5% of the property leaves, their share of operating costs are now spread out among the remaining tenants.
Many leases have this wording in the landlord's template and most tenants fail to recognize and remove this clause, and you should not be penalized for the landlord's vacancies - the landlord should absorb those operating costs.