Who Pays For What? Strategically Drafting and Reviewing Operating Expenses and Common Area Maintenance Costs In Commercial Leases

DICTA Magazine

Author( s) Grant T. Williamson

Business expenses (" OpEx") and common location upkeep fees (" CAM") are 2 crucial items in any industrial lease, but they are frequently overlooked after the choice is made on how to divide up these fees. Typically, operating costs are calculated and designated based on a gross, modified gross, or triple net basis, with the tenant being accountable for a portion of CAM based on the portion of the total residential or commercial property they inhabit. The property owner will generally have basic lease language for each kind of OpEx structure (i.e., gross, customized gross, or triple internet) and for CAM breakdowns. Once the landlord and occupant agree that, for instance, the rent will be calculated on a triple net basis with renter responsible for its in proportion share of CAM, let's state 20% for sake of illustration, landlord's counsel will usually just pull standard OpEx and CAM language from its term bank and call it a day. On the other side of the table, tenant's counsel will typically fall under the trap of only ensuring that the OpEx provision considers a triple net structure which the CAM breakdown properly lists 20%. But taking this narrow method to preparing and reviewing OpEx and CAM costs in business leases can open a pandora's box of concerns down the road as expenditures start to arise throughout the course of the leasing relationship and parties begin to second-guess who ought to be paying for what.

It is valuable to define the OpEx structures mentioned above and to supply more information on CAM expenses. OpEx, in some cases referred to as additional rent, is suggested to normally describe all expenditures connected with a lease outside of the base rent being charged. Freedom of contract enables the parties to decide how to break down OpEx, and the categories of gross leases, customized gross leases, and triple net leases are the 3 approaches that can be used.

In a gross lease, the base rent is all that the renter will pay. The base lease will be higher than the base lease under a modified gross lease or a triple net lease since the property owner is paying for all extra lease itself and has (ideally properly) calculated these expenses into one general base lease rate that will permit the proprietor to cover these expenses and realize an earnings on the lease of its area.

A customized gross lease is similar to a gross lease in that the base rent reflects some of the expected costs of additional rent products however varies in that a few of the typical additional lease products will be paid straight by the occupant. As such, the base lease rate under a customized gross lease will be less than under a gross lease and more than under a triple net lease. For example, a modified gross lease may supply that the base lease rate includes the costs of particular utilities, which property owner will pay directly, but not others, for which duty will fall on the tenant to pay directly.

A triple net lease will have the most affordable lease rate of all due to the fact that it expects that tenant will be accountable for all other costs associated with the lease and its operations thereunder. CAM, in other words, will include costs connected with areas that renter has access to, and rights to use, in common with other tenants at a residential or commercial property. These can vary commonly depending upon the type of residential or commercial property, however generally include several of the following: parking lots or decks, shared hallways, public restrooms, costs connected with landscaping at the residential or commercial property, and expenses related to keeping the residential or commercial property (however not related to preserving any premises specifically inhabited by any renter of the residential or commercial property).

As you might be able to inform by these meanings, "expenses" and "extra lease" and "common location" and "operating costs" are broad terms that could provide themselves to incorporating, or not including, all way of different items under a lease. The last thing either party desires is for a cost that they are accountable for to come as a surprise, specifically in longer-term industrial leases. As such, whether you are drafting a lease for a property owner or reviewing a lease for a tenant, it is very important to ask the following concerns of your customer:

- Can you list out all the expenses that you anticipate to be accountable for paying directly? Exist any expenses that you specifically do not anticipate to pay for?

• If the rent structure is not gross, what energies will the occupant be accountable for paying (e.g., water, gas, sewer, electrical, telephone, and/or internet)? Are there expense savings associated, for example, with the landlord acquiring energies for the whole residential or commercial property and after that billing them back to renter for repayment or through individually metering the tenant's properties to precisely divide expenses, or is it more expense effective for the renter to agreement for and pay for utilities directly? Will utility expenses be wrapped up in the definition of CAM?
• How will OpEx and CAM costs be examined: On a regular monthly basis per a set estimate? On a per basis? Based on actual expenses sustained and after that billed back to the occupant for repayment? If these costs are not billed back for repayment, how will approximated OpEx and CAM expenses be fixed up and changed: On an annual basis? On a month-by-month case?
• For landlords, will there be a related manager entity performing services for the residential or commercial property whose costs should be recouped either through OpEx or CAM costs? For tenants, should management costs be left out or topped?
• For occupants, based on past time in a building and relationship with the property manager, is it worth trying to push for a cap on OpEx and CAM boost year by year (e.g., placing language that tenant shall not be responsible for the payment of any OpEx and CAM expenses to the extent that they go beyond X% of such expenses for the instantly preceding lease year) to guarantee that property manager is incentivized to keep expenses reasonable and also not to use the residential or commercial property as an earnings center? For property owners, has enough monetary analysis been carried out to dedicate to a cap without the risk of consuming excess expenses down the road?
• How will capital improvement costs be paid for? Will they be amortized over a specific period of time, which is more common under a long-lasting lease or for a large, anchor tenant, or will proprietor consume these expenses (which they may not want to do if they just have a leasehold interest in the residential or commercial property)?
  
  At the end of the day, clarity is essential when it concerns drafting and revising OpEx and CAM provisions in commercial leases. While it can appear tedious to specifically consist of or leave out certain items rather than just including a note that the lease is, for example, a triple net lease which tenant's share of CAM is 20%, making the effort to fully understand who must pay for what will help prevent disagreements down the road and keep your client pleased.
  
  Republished with approval. This article was published in the Knoxville Bar Association's month-to-month magazine DICTA, January 2023, Volume 51, Issue 1.
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