Be careful with ‘expense clauses’ in commercial leases

It’s common in commercial leases for the tenant to pay a portion of the landlord’s property taxes and other expenses incurred in maintaining the property. Typically, the tenant’s portion is calculated as a pro-rata share, based on how much space in the building the tenant occupies.

But be careful: This pro-rata share can be calculated in two ways – as a percentage of the leased space in the building, or as a percentage of the leasable space in the building.

The “leasable space” method is better for the tenant. If a building has 100,000 square feet, and the tenant occupies 5,000 square feet, the tenant will pay 5% of the total expenses, no matter how much of the rest of the building is vacant.

The “leased space” method is more expensive and uncertain. For instance, if the building is only 83% occupied, the same tenant will now be paying 6% of the total expenses.

Calculating the percentage of “leased space” over a given period gets complicated, too, if tenants are moving in or out during the period.

It’s wise to double-check the calculations behind any invoice for expenses. Particularly with the “leased space” method, it can be easy to make an innocent mistake.

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