Tenant Negotiating Strategies for Utilities and Energy In Commercial Leases
Twenty years ago, utilities were rarely a problem for commercial tenants. Municipal or public providers furnished necessary services, which were plentiful and cheap. Hook-up charges were non-existent or minimal. Then came the energy crisis. Utility costs soared. Many landlords and tenants faced genuine shortages of utilities caused by short supplies of heating oil. The government imposed temperature control mandates for public buildings. Utilities got complicated and expensive.
In today's world, utilities are one of the most expensive elements of the landlord's common area costs. Shopping center and office building managers devote far more management attention to utilities and to the containment of utility costs than ever before. Increasingly, landlords are stepping into the shoes of the utility, and are requiring their tenants to purchase energy and utilities (especially electricity and energy for heating, ventilating and air conditioning, or HVAC) directly from them. Providing energy gives cash hungry landlords the opportunity to make utilities and energy a new profit center, and to collect a monthly energy charge from tenants as a component of their rent.
If the landlord is not the utility or energy service provider, the tenant should also consider the following issues when it negotiates the lease's utility clauses:
- Will the Landlord Give a Warranty of Utility Availability Clause? Many tenants negotiate for representations of utility availability from the landlord, so that there will be no surprises (i.e., certain utilities not being available) for the tenant when it builds its premises and when it opens for business.
- Can the Tenant Negotiate an Expanded Quiet Enjoyment Clause Which Includes Utility Interruptions? Normally, pro-tenant quiet enjoyment clauses only cover interruptions of the tenant's quiet enjoyment by the acts of the landlord, and by the acts of persons claiming through the landlord (e.g., for defects of title or ownership). Many sophisticated tenants seek to include continuous, uninterrupted utility services as an express element of the tenant's right of quiet enjoyment.
- Can the Tenant Get Covenants from the Landlord to Minimize Interference with the Tenant's Operations? Many aggressive tenants (especially retailers) negotiate for language in the lease which prohibits the landlord from materially interfering with the conduct of the tenant's business operations during utility modifications or repairs. Often, such clauses require the landlord to perform necessary repairs or related utility work on Sundays, or after normal business hours, if possible.
- Can the Tenant Install Devices to Moderate the Demand Portion of its Electricity Bill? If the tenant's electricity bill contains a separate charge based upon its highest usage of electricity during a particular period of time (i.e., the demand component), the tenant may be able to reduce substantially its electricity bills by installing a “load controller.” Load controllers switch off certain electrical equipment (e.g., HVAC units for the premises) for a few minutes each hour to lower the tenant's demand portion of its bill. The effect of switching such equipment off is usually negligible with regard to the tenant's operations, but can drastically reduce the tenant's total expenditures for power.
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