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LEASE AGREEMENT REFERENCE GUIDE 240: 18 WAYS TO CONTAIN TENANT OCCUPANCY COSTS IN COMMERCIAL LEASES $39.95


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Lease Strategies
240

Product Overview

This LARG discusses 18 suggested ways the tenant can use to contain occupancy costs for leased space. Among the 18 strategies discussed are:

  • renegotiation of existing leases when markets are soft;
  • exclusions of hazmat costs from operating costs or common area costs;
  • floor area measurement issues;
  • operating costs and common area cost addenda for new leases;
  • requirements that landlord estimates of operating and CAM costs be based upon the preceding year's actual costs; and
  • preferential CAM and operating cost treatment of retail anchors in retail complexes.

    Number of Single Spaced Pages: 18

 

Excerpt

18 WAYS TO CONTAIN TENANT OCCUPANCY COSTS IN COMMERCIAL LEASES

 

14 Retail Tenants Should Take a Close Look at Possible Preferential CAM Treatment of Anchors and Theaters

Many pro-landlord shopping center leases provide that any contributions to CAM costs from major tenants in the center will merely be deducted from overall CAM costs, and that the balance of such costs will be paid by all other tenants on a pro-rata basis (excluding the space occupied by such major tenants). This preferential CAM treatment is also sometimes accorded to movie theaters.

“Major tenants” may be defined by referring to the amount of square footage occupied by such tenants (e.g., “tenants that occupy more than 20,000 square feet of leasable space”), or by identifying the space occupied by such tenants on the plot plan for the center. This practice of excluding such contributions from the majors acknowledges a simple fact of retail life—major retail tenants have so much leverage that they do not pay the same CAM charges as everyone else. Of course, the exclusion approach also means that the smaller tenants of the center in fact subsidize the majors as far as CAM is concerned.

15 Require That the Landlord's Estimate of Operating or CAM Costs Be Based Upon Last Year's Actual Costs

Many office and retail leases require the tenant to pay for operating and CAM costs in advance in monthly installments on the basis of estimates prepared by the landlord. What prevents the landlord from inflating the amount of such estimates, and waiting until nearly the end of the lease year to see how actual costs compare to the cash collected from the tenants? If substantial sums of cash are left over, the landlord can review its operating or CAM costs wish list at that point, and make last minute expenditures to make operating or CAM costs approximate the amount actually collected from tenants.

Aggressive tenants often negotiate to include standards for the landlord's estimates of future operating and CAM costs to try to keep those estimates honest. For example, operating and CAM cost clauses can be modified with pro-tenant language which requires:

  • the landlord to base the estimates upon the prior year's operating or CAM costs, plus some agreed upward percentage adjustment for inflation or other projected increases;
  • the landlord to act reasonably when preparing the estimates, even though the language may contain no specific basis that the landlord must use for the preparation of the estimates; and/or
  • the landlord to prepare a detailed statement setting forth the basis for the estimate each time it is imposed or changed by the landlord.

16 Measure Floor Area and Scrutinize Floor Area Definitions in the Lease

The tenant should review all of its leases for definitions of rentable square footage and compare the definitions to past operating and CAM cost statements submitted by the landlord to determine if the statements were prepared in accordance with the definition.

If the premises for some locations were never measured, the tenant might want to have a professional do so, especially when there's reason to think that the square footage used by the landlord is wrong. Any measurements commissioned by the tenant should require that the professional measuring the space prepare a written report with a certification that the measurements were performed according to the definitions in the lease relating to floor area.

Many landlords include waivers of claims by the tenant for any discrepancy of rentable or usable square footage versus the figures contained in the lease used to calculate operating or CAM expense contributions from the tenant. Such waivers may prevent the tenant from asserting claims against the landlord for years of overpayments if the square footage contained in the lease turns out to be greater than the square footage contained in the actual premises.

Of course, the amount of rentable space in the premises is only one of two numbers used to calculate the tenant's pro-rata share of operating or CAM costs. The other number is the total amount of rentable square footage in the entire complex. This number can change over the term of the lease if portions of the complex are used for other than their original purpose (e.g., for retail or food service activities).

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