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Being overcharged on additional rent can keep a tenant up at night.
But you vacate your space and three years pass, you should be in the clear, right?
This is a story about a reputable, brand name tenant and a Real Estate Investment Trust that is ruthless about investor return and maximizing every last dollar of revenue with about 100 buildings under management.
Although the tenant is a recognizable brand in the consumer packaged goods industry, we are still talking about a "small guy" - they left behind just 3,000 square feet of office space. The office building is 80,000 square feet - 7 floors with most floors being about 12,000 square feet.
The problem arose when a couple of key tenants decided to vacate at the end of their lease. The area was deemed to be a little unsafe for employees. Such is life.
Now most leases address vacancies in a way that protects tenants. It is commonly referred to as the operating cost "gross up", not to be confused with the building gross up.
Here is a quick summary of the differences between those terms:
Building Gross Up: the useable area of your premises, plus your proportionate share of common areas, adding up to your rentable area, which is what you pay rent on.
Additional Rent Gross Up: calculating additional rent as if the building is 100% leased, therefore when vacancies arise, tenants are still charged their proportionate share and operating costs do not increase.
Here is what you need to know about this case study:
Let's look at some sample lease wording that addresses the issue of a tenant's proportionate share and how vacancies do not move the needle on what the total additional rent bill will be:
If less than 100% of the Rentable Area of the Building is occupied during any period for which a computation must be made, the amount of Additional Rent will be increased by the amount of the additional costs determined by the Landlord, that would have been incurred had 100% of the Rentable Area of the Building been occupied during that period, provided that the foregoing shall not result in the amount the Tenant pays as its Proportionate Share of such Additional Rent being greater than it would be if the Building was fully occupied.
In other words, if there is some premium the landlord has to pay for any services based on the building not being 100% leased, then that can be fair game, but note that it cannot result in the tenant paying more as their proportionate share.
For example, a janitorial company many charge more per square foot for a building that is only 50% leased than a building that is 100% leased, but a tenant that occupies 3.75% of the building will only pay 3.75% of that cost.
When the neighbors moved out, that created a full floor and a half of vacancy. The building vacancy rate spiked from 0% to 22.5%. Our client decided to relocate as well and did not give a second thought to the building when they left.
Then they received an email three years later from the old landlord with an additional rent reconciliation statement.
The landlord was looking to reconcile (translation: collect) additional rent from the last three years. We suspect that if the reconciliation was in the favor of the tenant then perhaps they would have never received the email!
The CFO for this company promptly emailed back asking for verification of costs before she could approve this internally. A few months passed with more emails exchanged but the process had not moved forward in any way. Finally the property manager used some language to justify the reconciliation - vacancy recoveries.
Vacancy Recoveries is not a term typically found in leases. It really is not a standard term at all. It became apparent that the property manager was purposefully vague in his emails and did not provide tangible costs to the client as it was really just a shake down.
Vacancy recoveries it turns out was the landlord's attempt to spread the additional rent amongst all the leased space, not the entire building square footage.
The landlord was trying to change the formula from:
$1,664,800 x 3.75% (tenant's share of the building) = $62,430
$1,664,800 x (3,000 square feet / 62,000 square feet of leased area) = $80,555
In this case the landlord is proposing that the tenant's proportionate share is 4.83%. While the tenant did represent 4.83% of the tenants in the building, they still only represented 3.75% of the size of the building.
Lease Ref reviewed the lease to discover a couple of items:
So even if the tenant's lease was silent on item # 1, the statute of limitations on the landlord collecting any additional rent had long since lapsed.
The client emailed the former property manager back to point out that the lease does not allow for a grossing up of additional rent due to vacancies and that their time limit to even state their case expired 2.5 years ago.
The client spent $300 for Lease Ref's report, sent one email to the former landlord and eliminated a $60,000 headache and everyone went away happy. Except for the former property manager. He just went away.
What's in your lease?