LEASE AGREEMENT 821: AGGRESSIVE PRO-TENANT OPERATING COSTS ADDENDUM FOR OFFICE, INDUSTRIAL, OR RETAIL LEASE $99.95
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Office, retail and industrial tenants are all too familiar with modern pro-landlord operating cost provisions. Such clauses give the landlord the right to “pass through” operating expenses for the building or project to their tenants based upon the amount of floor area that the tenant occupies. Since the definition of operating costs in pro-landlord leases is usually extremely broad, seasoned tenants have developed their own comprehensive lease addenda or riders which exclude various items from operating costs. It was simply self defense.
Since the landlord and the tenant rarely ever remove an item from the list of specific things included in (or in the case of the tenant's addendum, excluded from) operating costs, the clauses have grown at roughly the same rate as the federal debt. As a result, lease negotiations often become extremely rancorous between a landlord and a tenant both armed to the teeth with their respective lists of inclusions and exclusions for operating expenses. Long laundry lists on both sides also make for long lease negotiations.
However, not all operating expenses (or exclusions) are created equal. Many items contained in operating expenses clauses (or addenda) simply do not apply to the specifics of a given deal. For example, a pro-tenant exclusion for costs associated with the initial construction of the building are hardly crucial for an existing complex built several years ago earlier. Likewise, a pro-tenant exclusion dealing with parking structure costs might not make much sense for a complex that will never have a parking garage due to the physical constraints of the site (i.e., lack of land for the facility).
As vacancy rates move higher, tenant leverage over operating costs language increases. As vacancies decline, obviously, negotiating leverage increases for the landlord. Both the landlord and the tenant must be attentive to changing market conditions, which clearly have an impact on specific items that will either qualify as, or be excluded from, operating expenses.
In the interest of making more deals, and making faster deals, both the landlord and the tenant might consider reviewing their “standard operating cost clauses” to ensure that the items they contain matter in the real world. Such a review should, of course, go beyond inclusions and exclusions to operating costs. It should also cover items such as realistic expense stops which actually cover first year operating costs, and reasonable operating cost audit rights for the tenant.
The pro-tenant addendum that follows contains numerous exclusions to pro-landlord operating cost clauses in pro-landlord form leases. Generally the language appearing in pro-landlord lease forms defining permissible common area maintenance and operating costs is extremely broad. The exclusions which follow are designed to restrict that broad pro-landlord verbiage by limiting the types of items which may be passed through to tenants for payment on a pro-rata basis.
OCCUPANCY COSTS ADDENDUM
This Occupancy Costs Addendum (“OCA”) is made as of _________________, by and between COMMERCIAL PROPERTY LANDLORD, INC., a __________________ corporation ("Landlord"), and AGREEABLE TENANT, INC., a _________________ corporation ("Tenant"), and modifies that certain lease agreement (“Lease”) of even date herewith by and between Landlord and Tenant.
1. Landlord and Tenant acknowledge that Operating Costs for the Complex shall be calculated in accordance with the applicable sections of the Lease. This OCA is attached to the Lease to modify the Lease with respect to the computation of Operating Costs, in addition to certain other provisions contained herein. To the extent that there is any inconsistency between any other provisions of the Lease and this OCA, then in such event, the provisions of this OCA shall prevail.
2. Operating Costs that cover a period of time not within the Term of the Lease shall be prorated.
OPERATING COSTS EXCLUSIONS
3. The following items shall not be included in Complex Operating Costs:
(a) any expenses which under generally accepted accounting principles and sound management practices would not be considered a normal maintenance or operating expense;
(b) all costs associated with the formation, operation, and maintenance of the business or legal entity which constitutes Landlord, as distinguished from the costs of Complex operations, including but not limited to, costs of partnership accounting and legal matters, costs of defending any lawsuits with any mortgagee (except with regard to the actions of Tenant), costs of selling, syndicating, financing, mortgaging, or hypothecating any of the Landlord's interest in the Complex or Common Area;
(c) costs of any disputes between Landlord and its employees, costs of disputes of Landlord with Complex management, or costs paid in connection with disputes with Tenant or any other tenants;
(d) expenses in connection with services or other benefits of a type which are not provided Tenant but which are provided exclusively to another tenant or occupant;
(e) costs incurred due to violation by Landlord or any tenant of the terms and conditions of any lease;
(f) payments in respect of overhead or profit to subsidiaries or affiliates of Landlord, or to any party as a result of a non-competitive selection process for management or other services in or to the Complex, or for supplies or other materials to the extent that the costs of such services, supplies, or materials exceed the costs that would have been paid had the services, supplies or materials been provided by parties unaffiliated with the Landlord on a competitive basis;
(g) all costs (including permit, license and inspection fees) incurred in renovating or otherwise improving or decorating, painting or redecorating space for tenants or other occupants or in renovating or redecorating vacant space, including the cost of alterations or improvements to Tenant's Premises or to the premises of any other tenant or occupant of the Complex or its Common Area;
(h) any cash or other consideration paid by Landlord on account of, with respect to, or in lieu of the tenant improvement work or alterations described in the clause above;
(i) costs incurred by Landlord for alterations or additions which are considered capital improvements and replacements under generally accepted accounting principles and sound management practices;
(j) costs incurred by Landlord in connection with the construction of the Complex and related facilities, the correction of defects in construction, the discharge of Landlord's obligations under the Work Letter attached to any lease, or the cost of Landlord's negligence, including without limitation, the selection of Complex materials;
(k) any improvement installed or work performed or any other cost or expense incurred by Landlord in order to comply with the requirements for obtaining or renewal of a certificate of occupancy for the Complex or any space therein;
(l) cost of replacement of capital equipment;
(m) any reserves for equipment or capital replacement;
(n) costs of a capital nature, including, but not limited to, capital improvements, capital repairs, capital equipment, and capital tools, all as determined in accordance with generally accepted accounting principles and sound management practices;
(o) Landlord's costs of any services sold or provided to tenants or other occupants for which Landlord is entitled to be reimbursed by such tenants or other occupants as an additional charge or rental over and above the basic rent (and escalations thereof) payable under the lease with such tenant or other occupant;
(p) expenses in connection with services or other benefits which are provided to another tenant or occupant and does not benefit Tenant;
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