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LEASE AGREEMENT REFERENCE GUIDE 740: STRATEGIES FOR OPERATING COSTS ADDENDA $24.95


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Lease Strategies
740

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This LARG looks at the practice of attaching an operating costs addendum to office leases to provide additional detail concerning the precise operating costs that will be collected by the landlord. The first part discusses the evolution of the operating costs clause of the office lease, and considers when an addendum might be appropriate. The Lease Clause Critique looks at an operating costs addendum which contains both pro-landlord and pro-tenant language regarding operating costs.

Number of Single Spaced Pages: 12

 

Excerpt

STRATEGIES FOR OPERATING COSTS ADDENDA

 

Do Your Office Leases Need an Operating Costs Addendum?

As if there were any doubt, operating costs for office space add up to real money these days. While office building operating costs generally range between $5 and $8 per square foot per year in most U.S. markets, in selected cities they are much higher. Given the huge amount of operating costs paid by tenants and collected by landlords, one wonders if the amount of detail in the garden variety office lease pertaining to such costs is adequate, especially with regard to the particular types of costs that will actually be collected.

During the Seventies and early Eighties, the vast majority of office landlords adopted the use of a comprehensive operating costs or direct expense clause for their office leases. Such clauses contain broad definitions of "operating costs," and obligate the office tenant to pay its proportionate share of such costs as additional rent based upon the amount of square footage leased by the tenant in the office building.

The Kitchen Sink

The wording in many such clauses is broad enough to permit the landlord to include virtually any expense associated with the office building in the pool of costs to be reimbursed by the tenants on a pro-rata basis. For example, the operating cost clauses in many office leases obligates the tenant to pay its share of "...any cost or expense incurred or expended by Landlord in connection with the operation, maintenance, management, and repair of the Building, including, without limitation..." Following such introductory language, the landlord normally sets out a long list of broad categories that represent the types of operating costs that can be collected from the tenant under the clause.

Just because a particular type of cost is contained in the "including, without limitation" list does not mean that the item will actually be collected by the landlord. Likewise, if a particular operating cost item is not specifically contained in the "...including, without limitation..." list, its absence doesn't necessarily preclude its collection if it is arguably a cost "...incurred or expended by Landlord in connection with the operation, maintenance, management, and repair of the Building..."

So precisely what items will be collected as operating costs under any given lease? The answer to that question, of course, depends upon the practices of the particular landlord. Such practices are hardly uniform, and there is no assurance for the tenant that operating costs will be administered consistently, even within the same office market.

Does It Pass the Smell Test?

As office tenants (particularly national tenants who leased office space across the country) gained experience with comprehensive operating costs clauses, they began to resist the inclusion of certain costs in operating costs by landlords, even though such costs theoretically were "...incurred or expended by Landlord in connection with the operation, maintenance, management, and repair of the Building..."

For example, many tenants questioned the following types of expenses when they appeared as operating costs:

  • Marketing and legal expenses incurred by the landlord to lease space in the office building to new tenants;
  • Improvement or renovation costs incurred by the landlord to lease new space;
  • Costs to correct construction defects in the office building;
  • Costs covered by insurance or warranties;
  • Capital costs for the building, which many tenants thought should be paid by the landlord out of the rental stream from the building; and
  • Costs associated with the operation of adjacent parking garages or structures.

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