Don't Blindly Agree to Pay "Deemed" Percentage of Operating Expenses

December 8, 2009
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When negotiating an office lease, do not blindly agree if the owner proposes that you pay a “deemed” percentage as your proportionate share of operating expenses, taxes, and insurance. By agreeing to pay a “deemed” percentage, you have agreed to pay that percentage regardless of how the actual size of your space compares to the size of the building. That could be a costly agreement. A deemed percentage the owner proposes might bear no reasonable relationship to the percentage that the actual size comparison would produce. So you could be required to pay a much greater share of operating expenses, taxes, and insurance than you otherwise would be responsible for.

For example, the tax escalation clause in a New York tenant’s lease deemed the tenant’s proportionate share of any tax increases for the building to be 6 percent. In 2003, the tenant’s tax bill from the owner more than doubled. The owner refused to reduce the tenant’s proportionate share of the increase. So the tenant sued the owner and asked the court not to apply the tax escalation clause.

A New York court dismissed the lawsuit, saying that the tax escalation clause applied. The noted that the clause set out a clear formula for determining the tenant’s share of tax increases, and the tenant had agreed to it. The court would not consider the determination by the tenant’s architect that the tenant’s space was much less than 6 percent of the building’s total area and that the tenant’s obligation to pay 6 percent of the tax increase was unfair. And a disclaimer in the lease said this percentage bore no relation to the size of the space compared to the size of the building. The court said that it would not rewrite the lease to relieve the tenant of its bad deal [609 Corp. v. Park Towers S. Co., LLC,].

You can agree to a “deemed” percentage when negotiating an office lease, but first require the owner’s architect to certify the size of the rentable areas of both the space and the building. The certification should say that the architect measured those areas in accordance with measurement standards of the Building Owners & Managers Association. Otherwise, the architect might try to use measurement standards that can be manipulated to the owner’s advantage. Calculate the percentage of your proportionate share by using the architect’s certified results. Then agree in the lease that your proportionate share of operating expenses, taxes, and insurance will be deemed to be the percentage that you calculated. If you later discover that the architect’s certified results were faulty and, as a result, your proportionate share is too large, you may have a right to sue the owner to reduce your proportionate share.