Common Area Expenses in Commercial Leases
- Oct 1 2014
There are three primary different types of commercial leases: gross leases, modified gross leases and net leases. One variation of the net lease is a “triple net” lease, in which the tenant is liable for a net amount of property taxes, insurance and common area maintenance relating to the property they are possessing. Most of the time, additional fees in the form of common area maintenance expenses come up in the context of a triple net lease. Landlords ask tenants to pay these fees so that tenants contribute to the cost of maintaining common areas such as entranceways, walkways, parking lots and elevators, as well as services enjoyed by the tenants such as janitors, security and landscapers. These fees are in addition to a rental payment and can be substantial depending upon the situation. These fees are typically charged on a pro rata basis, based upon the square footage of each tenant’s premises, as compared to the square footage of the project as a whole.
It is essential that a business owner be informed about the terms of the lease they are entering into, especially if these terms have the potential to cost them money. As common area expenses can be a significant cost they are often controversial and hotly negotiated. Most of the disagreements over these terms relate to the distinction between costs for the maintenance of common areas, and expenses that should be the landlord’s responsibility, such as significant upgrades to common area infrastructure or capital improvements. Generally, the test is who will benefit most from the expense, the tenant or the landlord. For example, it can be argued that tenants should not be paying for improvements that are being done to increase the overall value of the property because the landlord will be the primary beneficiary of these improvements.
When negotiating common area expenses, the business owner should inquire as to the purpose of the payments. In some instances, the tenant is only responsible for increases in common area expenses over a defined base year. Prospective tenants should also ask whether they will be able to review what the landlord is spending the money on at any given time, and whether the landlord is adding an administration or overhead fee for managing the common area. Business owners should seek the advice of an attorney, who will be able to explain many of the options available to them. For example, there might be an opportunity to ask for a cap on common area expenses, or a fixed rate. Most importantly, tenants should be informed about their legal options in the event of a dispute.
If you are contemplating signing a commercial lease and you will be responsible for common area expenses, it is in your best interest to consult with a real estate attorney to ensure you understand your potential liability before signing on the dotted line.
The real estate attorneys at Schneiders & Associates, L.L.P. are expert in interpreting and negotiating commercial leases, and would be happy to guide any prospective tenants through the process.