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Lease Strategies

Product Overview

This LARG contains the following items:

Should the Tenant Expand Its Operating Costs Addendum?, and the Lease Clause Critique: Adding Bells and Whistles to the Operating Costs Addendum.

Number of Single Spaced Pages: 12





This LARG focuses upon the operating costs addendum, a device used by tenants to itemize exclusions to broad pro-landlord definitions of operating costs. The first part looks at the traditional form of the operating costs addendum and proposes expanding its scope with a few new related provisions. The Lease Clause Critique features an expanded operating costs addendum packed with pro-tenant exclusions--as well as audit, arbitration, and refund clauses--with comment.

Should the Tenant Expand Its Operating Costs Addendum?

Sophisticated tenants don't really need to look at the actual documents to know what kind of language lurks in the operating costs and common area maintenance clauses of aggressive pro-landlord lease forms. Pro-landlord forms are numbingly similar, as far as the tenant is concerned. They invariably contain extremely broad definitions of operating costs. And the definitions are so broad that they transform virtually any landlord expense associated with the "operation, maintenance, management, or repair of the complex" into an operating cost. The result of all this is simple—the tenant pays.

Experienced tenants who do deals all over the country become extremely uncomfortable when they see such general language. Seasoned tenants want to avoid the nasty surprises that broad language can spawn. They want assurances the landlord will not try to collect certain items as operating costs which they regard as objectionable.

For example, tenants don't think it's fair for the landlord to collect renovation costs for space leased to other tenants as an operating cost. Likewise for brokerage commissions and attorney fees paid to negotiate new leases in the complex. Same thing for attorney fees and costs of enforcing the leases of other tenants in the complex when they default. It's not that those costs aren't related to the management of the complex—they are. It's just that they should be paid by the landlord as the owner of the property, not by the tenants as operating costs.

Getting Tenant Exclusions on the Table

The tenant must battle the landlord's general language with its own specific exclusions. To do this, many tenants use an operating costs addendum to exclude particular items from the scope of operating or common area maintenance costs. For tenants who do lots of deals, it's easier to use a standard form addendum to itemize these exclusions, than to enumerate them one by one during negotiations. The tenant recognizes it will need to compromise on some of the exclusions—it just uses the addendum to get them out on the table.

Losing the War

There's no doubt exclusions to operating costs form the heart and soul of the addendum. But the tenant can win the battle and lose the war with operating costs. This happens when the tenant negotiates a handsome package of exclusions, but the landlord's staff ignores some or all of them in calculating the tenant's pro-rata share of operating costs.

How can this happen? Such exclusions are not usually intentionally ignored by landlord—that's fraud. Sometimes, however, they are overlooked, for any number of reasons. Perhaps the landlord has had some staff turnover. The new staff might not be as attentive as they should be to exclusions in individual leases when annual operating costs are prepared and reconciled. Maybe the landlord's staff focuses too much upon preparing overall operating expenses calculated according to the definition of operating costs in the landlord's unmodified lease form. For whatever reason, these things do occur.

This means the tenant must monitor the calculation of operating expenses to ensure that its negotiated exclusions are plugged into the landlord's annual calculations. The tenant can do this by expanding the scope of the traditional operating costs addendum to include the following related provisions:

  • audit rights for the tenant to ensure operating costs are collected in the manner negotiated;
  • arbitration procedures to resolve disputes between the parties about additional rent; and
  • refund provisions which obligate the landlord to give the tenant a credit for refunds the landlord receives of previously paid operating costs or real estate taxes.


End of Excerpt