Negotiate Operating Expense Exclusions

Negotiate Operating Expense Exclusions

Most commercial leases that require payment by the tenant of its share of the building’s operating expenses include a lengthy definition of the term “operating expenses.” The definition typically includes a laundry list of potential and actual expenses for which the tenant will be responsible. While many landlords are willing to exclude certain limited items from operating expenses, they typically have little patience when discussing operating expense exclusions. Most commercial tenants are left with an overly broad definition of operating expenses and a narrow list of exclusions.

A tenant’s liability for operating expenses might approach or even exceed its liability for base rent, yet unlike base rent, operating expenses are rarely fixed or tied to a formula that provides any degree of certainty. Rather, operating expenses are outside the control of the tenant, and in many cases, rather unpredictable.

During the letter of intent stage, there are certain concepts tenants should include to obtain certainty regarding operating expenses—such as expense stops or caps on controllable operating expenses. It’s worth discussing these concepts with your attorney.

To familiarize yourself with five crucial concepts all tenants should include in their leases to protect against runaway operating expenses, see “Five Ways to Limit Your Liability for Operating Expenses,’” available to subscribers here.