Allocating Operating Expenses in Commercial Real Estate Leases: Negotiating Strategies for Landlords and Tenants

Description

The allocation of operating expenses in a commercial real estate lease is based on the lease structure involved, whether a net lease, triple net lease, gross or modified gross lease. Operating costs broadly include utilities, taxes, insurance, lease premise maintenance, common area maintenance and management expenses.

One key issue in allocating operating expenses is defining what to include in various categories of operating expenses. The scope or definition of operating expenses is a matter of contract, so counsel must scrutinize the lease language and exclusions when negotiating operating expenses.

Tenants often seek to negotiate a cap on operating expenses and the critical distinction is whether that cap is cumulative or non-cumulative. Another critical provision governing operating expenses is the gross-up provision that makes operating expenses vary with the occupancy of the building. Properly drafted, gross-ups will benefit both the landlord and tenant.

Counsel must understand options when negotiating these provisions to shield clients from unexpected costs and charges due to unclear provisions regarding tenant reimbursement to the landlord.

Listen as our authoritative panel of real estate practitioners walks you through the different lease structures and the more common allocations of operating expenses within each structure. The panel will look at negotiating perspectives of both landlords and tenants on defining operating expenses, pass-throughs, exclusions, gross-ups, expense caps, and other lease provisions impacting expenses.