Commercial Leasing Series - Operating Expenses

By: Laila Parvez

In a “net” lease context, the tenant generally pays all of the landlord’s actual operating expenses relating to the leased premises, as well as a share of the landlord’s operating expenses for the whole of the building and/or Complex in which the leased premises are located.  These costs are in addition to the base rent (i.e. the stated dollar amount per square foot of rentable space) payable by the tenant.

Operating expenses, at a minimum, include the landlord’s costs of insuring, maintaining and repairing the premises.  From a tenant’s perspective, the importance of reviewing and understanding what is included in operating expenses for the Complex cannot be overstated.  Prior to signing an Offer to Lease, a tenant should ask for, and review, historical data showing the actual operating expenses of the Complex for at least the previous two years so that it has an idea about how much it can expect to pay during the term of its lease.  Otherwise the tenant may find itself in a situation where it is required to pay significantly more than it anticipated or budgeted for.  The tenant should also try and negotiate a maximum increase in its proportionate share of operating expenses year to year.  For example, a landlord may agree to cap the increase of the tenant’s proportionate share of operating expenses to the increase in the Consumer Price Index over the previous year or a percentage of the costs over the previous year.

Tenants should carefully review the language relating to operating expenses in their lease to ensure that that they are only being charged their proportionate share of the landlord’s legitimate costs in operating the Complex/building without gross-up, duplication or profit.  The idea behind charging tenants a portion of the landlord’s operating costs is to protect the landlord from being out of pocket, but the landlord should not be making a profit by charging the tenant more than it actually pays on account of such expenses.

Certain items, such as taxes on the landlord’s income, capital taxes, payment of interest and default charges arising as a result of the Landlord failing to pay bills when due, costs incurred in connection with the construction, improvement of remodelling of the project, fines resulting from the landlord’s negligence or faulty workmanship in originally constructing the premises or costs relating to remediation of environmental problems either do not benefit the tenant in any way or are payable as a result of the landlord’s failure to manage the property or costs in a responsible and prudent way. Consequently, these expenses should be excluded from operating expenses and the tenant should not be required to pay its proportionate share of such expenses.  

For a discussion of additional items relating to commercial leasing from the tenant’s perspective, please click here.

For more information on commercial leasing matters, please contact Laila Parvez at (416) 368-0491 or by email at lparvez@businesslawyers.com.

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