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Describing and Defining Rent in Commercial Leases

September 8, 2014

As the source of income to the landlord and the primary expense to the tenant, rent is at the heart of any commercial lease.  Defining rent and determining how and when it is to be paid is thus one of the critical issues in any lease negotiation.

How to describe and draft clauses pertaining to base rent and additional rents depends in large part on the nature of the tenancy and of the demised premises.  Office leases, retail leases and industrial or flex space leases often contain lengthy sections in which the specific component parts of rent and exclusions from rent are set forth in great detail.

All leases contain a base rent – a flat charge for occupancy of the premises, usually payable monthly and often increasing by a fixed amount from year to year.  Base rent is often calculated by multiplying the number of square feet in the premises by a “dollars per square foot” number.  In such event, determining the size of the premises is crucial.  Especially if the demised premises is under construction prior to term commencement, the lease should provide for a space measurement prior to occupancy; however, there is certainly no prohibition on making that determination even if there is no initial space modification or fit-out.

When a lease calls for the tenant to pay charges over and above base rent, proper lease drafting demands a detailed description and limitation of those charges.  Colloquially known as “triple net” charges, “additional rent” or “common area expenses,” it is best to avoid the use of terms of art at the expense of proper detail so as to avoid confusion about what charges are truly the responsibility of the tenant and how those charges are to be calculated and billed by the landlord.

Among the most frequent “pass-through” charges in commercial leases are real estate taxes, insurance costs, maintenance and repair charges and utilities.  If a tenant does not occupy the entire property, then determining the tenant’s proportionate share of those charges is commonly based upon the percentage of the leasable square feet occupied.  Landlords might bill a tenant one-twelfth of the estimated annual cost of these pass-through items, with some kind of reconciliation at the end of each lease year or each calendar year, depending on the nature of the charges billed.  Tenants often request the right to review underlying bills and invoices to be sure the estimates are reasonable and to confirm the amount of any annual “true-up.”  

Tenants and landlords often debate who should be responsible for costs of capital repairs to the demised premises or the structure in which the premises is located, as well as the cost of repair or replacement of HVAC components, windows, roofs, doors and other building components.  Resolution of these issues often depends on the nature of the tenancy and the building: is the tenant the sole occupant of a free-standing structure?  A store in an in-line strip shopping center?  A commercial office in a high-rise, urban building?  Or a retail store, such as a copy center, or a medical office in a multi-building, mixed-use suburban office park?   There is virtually no limit to the factors which play into the dynamics of which party pays for operating or maintenance costs of the demised premises or the building or complex in which the premises is located. 

What is included and what is excluded from landlord expenses passed-through as additional rent is among the most complicated issues which landlords and tenants face in a commercial lease negotiation.  Addressing these issues in a thorough and thoughtful manner is critical to the ongoing relationship between the parties, which may extend for decades.  Best practice is always to be as detailed as possible up front to avoid complex and expensive disputes in the future.

For questions about your leases, whether you are a landlord or a tenant, please feel free to contact Kenneth Fleisher, Esq., Chair of Zarwin Baum’s Real Estate Department, at 267-765-9610.

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