Clauses on Operating Expenses

Operating expense clauses in commercial leases may be categorized into two distinct groups. The first type, Triple Net leases, obligate the tenant to pay for some operating expenses directly, such as cleaning, utilities and HVAC maintenance, and others based on the percentage of the building leased. These include common expenses such as snow plowing, landscaping, roof repair and plumbing.

The second type of operating expense clause, inherent in a gross or adjusted gross lease, is based on expenses that exceed a certain level, typically established during a tenant’s first year (commonly referred to as the Base Year). It can be affected by the occupancy rate, especially in terms of variable costs such as cleaning. Landlords often calculate the amount by “grossing up” the operating expenses as if the building were full. Tenants should confirm the same “grossing up” process is used to determine the base year expenses.

In general, all expenses should be reasonably incurred and supported by documentary evidence available for the tenant’s review.

Larger tenants should pay particular attention to operating expense clauses and include specific language to protect themselves from large increases. Tenants must also be conversant with the many ways to determine square footage because the measurement can affect the percentage used in calculations.