Addressing Caps on Annual Operating Expense Increases
With increasing frequency, commercial tenants, looking for cost certainty, are requesting caps on annual increases in operating expenses. For the landlord, it is important that these caps are limited to controllable expenses and are cumulative. If the cap does not exclude expenses over which the landlord has no control, such as the cost of snow removal (which could vary greatly from year to year) and costs for utilities and insurance, the landlord may not be able to pass through the entire amount of such costs to tenants. If the cap is not cumulative, which means that the cap is applied each year to the prior year's cap (rather than to the prior year's expenses), and there were a large increase in operating expenses in a particular lease year, the landlord could end up being penalized for minimizing expense increases in prior years by being unable to pass through some of the increased expenses.
Blake T. Fritz is Of Counsel at McCausland Keen & Buckman, and a member of the Real Estate Group. For more information, contact Blake at firstname.lastname@example.org.
The views expressed here do not constitute legal advice; parties to real estate transactions should seek legal counsel.