Controlling Uncontrollable Expenses

By: David Blattner

It has been some time since I last wrote about operating expenses in leases.  Tenants like certainty in budgeting and, because of the way most leases are drafted, landlords often have flexibility to change and increase operating expenses each year.  I have previously offered suggestions on how tenants can limit some of this uncertainty and control or limit expenses here.

But let’s talk for a moment about uncontrollable expenses: taxes, utilities and insurance.  While landlords can’t agree to caps on increases in uncontrollable expenses from year to year, it is incumbent on tenants to make certain that they don’t pay for anything that the landlord or that another party should pay for.  For example, it is obvious that a tenant shouldn’t pay landlord’s income tax, estate taxes or personal or business taxes.  Nor would a tenant pay for utilities for other tenant space which is separately metered and not shared pro-rata among all tenants.  These are some specific exclusions that could and should be added to leases.

Likewise, it is important to distinguish what insurance carried by a landlord should be included in the definition of Operating Expenses and therefore paid by a tenant.  I’m currently negotiating a lease for a tenant where the landlord has insisted that the tenant pay for its rent loss insurance.  Rent loss insurance covers a landlord where a tenant is not obligated to pay rent under a lease following a casualty or other force majeure event.  Our lease, like most leases, provides that in these cases, rent is abated.  If a tenant is required to pay for a landlord’s rent loss insurance, the tenant would, in essence, be paying rent during a time when rent is otherwise abated.  This is an area where a tenant should save on operating expenses.

In this particular lease, the landlord included rent loss insurance in the “Landlord Insurance” paragraph, making it part of the defined term “Insurance” which is then included in the definition of Operating Expenses.  It would be easy to overlook this hidden cost.  Tenants should carefully read, and negotiate, every expense provision and all provisions which are related to this to find all possible cost savings – doing so can help control even the most uncontrollable expenses.