January 10, 2023

Time for Action: Add These Items to Your Commercial Lease in 2023

If you’re a commercial tenant, the New Year is a good time to check in on a few key aspects of your lease to protect yourself in the year ahead. The biggest source of confusion for many business owners is the charges incurred for common area expenses (“CAM”) or operating expenses (“OPEX”). Specifically, there is confusion around landlord and tenant payment obligations, timing, rights and exclusions.

That said, here are some important CAM/OPEX clarifications and additions to consider when evaluating your lease in 2023:

1. Obligation of the landlord

Ideally, the lease should have an obligation of the landlord to provide a reconciliation of the actual CAM or OPEX and the tenant’s actual share against the estimated payments made by tenant, with a refund to the tenant if the tenant has overpaid. Require the landlord to provide this reconciliation to the tenant within some reasonable time period (120 days after year end) for the tenant to review and ensure the tenant has not been overcharged.

2. Audit Rights

Upon receipt of the reconciliation statement, the tenant should have the right to audit the books and records of landlord with respect to CAM or OPEX to ensure the tenant has not been overcharged. The landlord will likely require any auditor engaged to not be paid on a contingent basis. Also, if the tenant’s share of CAM or OPEX was overstated by 3-5%, specify that the landlord should pay for the cost of the audit.

3. Limitations on right of landlord to bill tenant for CAM or OPEX

It can happen where the landlord fails to include an expense(s) in CAM or OPEX within the applicable calendar year. For example, FBFK had a client that received a bill for its share of prior years’ CAM or OPEX from several years earlier. This was because there was nothing in the lease that prevented it. Our recommendation is to ask the landlord for a limitation on time allotted for back-billing for previously unbilled expenses. Generally, a landlord will not agree to the end of the calendar year in which the expenses was incurred, but landlords have agreed from anywhere from six (6) months after the end of the applicable calendar year to two (2) years. Regardless, if the term of the lease is of any substantial period (5+ years), try to get some kind of limitation.

4. Exclusions from CAM/OPEX

Generally, the lease will provide that CAM/OPEX include all costs and expenses incurred by the landlord in operating, maintaining and managing the Common Area/Building. However, there are a number of exclusions to CAM/OPEX that we suggest, and some landlords are more receptive to the exclusions than others. These include:

Capital improvements (except as may reduce OPEX, and then amortized over the useful life)
Leasing commissions
Renovating or otherwise improving vacant space
Administrative costs/overhead of the landlord in excess of five percent (5%) of the total cost of operating, maintaining and managing the common area
Salaries and benefits above the grade of property manager (all allowable salaries and benefits shall be apportioned by the percentage of time devoted to the premises versus other properties) and/or management fees to the property management company managing the property in excess of four percent (4%) of gross rents of the property
Legal fees for preparation of leases or rents payable with respect to any leasing office of the landlord/property manager
Expenses incurred due to the negligence or willful misconduct of the landlord or any occupant, or their respective agents or employees
Interest, late charges or penalties incurred as a result of the landlord’s failure to pay bills timely
Any costs, fees, fines or penalties, or interest thereon, incurred due to violations by the landlord or any occupant of any governmental law, ordinance, code, rule or regulation; all other costs to comply with the requirements of any laws, codes or other governmental regulations, including, without limitation, the Americans Disabilities Acts, in place as of the date of the lease outside of the premises
Court costs or legal fees incurred to enforce obligations of other tenants under leases
Reserves for anticipated future expenses
Amounts paid to entities related to the landlord in excess of the cost of such services from any competitive source
Rent or other charges paid by the landlord pursuant to any ground or master lease
Costs and expenses resulting from a breach by the landlord of its obligations under the lease or any other lease for portions of the property.

The bottom line: All too often commercial tenants accept their lease agreements freely and without any objections. However, a one-time review of the lease can lead to years of savings for a small business. Take action now.

As co-leader of FBFK’s intellectual property practice group, Kubasta focuses on a wide array of intellectual property, with particular emphasis on patent, trademark, and trade dress litigation and licensing. He has extensive litigation experience, advising both plaintiffs and defendants, in Federal Court – both trial and through appeal – as well as in Texas state court. Kubasta is a nine-time The Best Lawyers in America honoree, recently served as a Board Member of TeXchange DFW, and works with various non-profit organizations.

A three-time “Ones to Watch” honoree and an attorney and shareholder at FBFK, Smiley has more than a decade of bankruptcy and reorganization law experience, with specific expertise in all steps of the Chapter 11 reorganization process, including asset sales, plan confirmation, and post-confirmation plan administration. She also has experience litigating a variety of disputes, including contested matters and adversary proceedings. Smiley is a Member of the American Bankruptcy Institute (ABI) and the Dallas Bar Association – Bankruptcy and Commercial Law section, a Global Executive Board Member of the Turnaround Management Association (TMA) and has served as Chair of the DFW network of IWIRC (International Women’s Insolvency and Restructuring Confederation).