Leasing 101, Part 7: Nine Tips for Negotiating Additional Rent
In a lease, 'additional rent' generally is defined as any amount due to landlord by tenant over and above base rent. Depending on the lease, the big three additional rent items are (i) common area maintenance costs, (ii) real estate taxes, and (iii) landlord’s insurance.
Common area maintenance costs (CAM), taxes, and insurance are highly technical lease provisions, and their respective lease sections are complicated. This post cannot cover everything about them, and an experienced attorney should be consulted for the lease review. That said, here are nine tips for consideration:
Common Area Maintenance Costs:
CAM expenses are landlord’s costs of operating the building or shopping center housing the leased premises. The general rule of thumb for CAM is that the costs need to specifically relate to the operation of the building or the center. CAM should not include any costs relating to landlord’s other properties or to its unrelated business expenses.
A prospective tenant should ask for and review historical CAM records. Typically, a tenant will request three years of CAM records. Not only should the specific costs be checked, but the year-to-year trends should be analyzed as well to gauge what the annual cost increases might be. The analysis should also check for unplanned events, including unusual weather like heat, snow, and storms, that might impact the normal trends for the property.
In addition to the summary of CAM expenses, the lease will (or should) have a list of costs specifically excluded from CAM. This list is important, and there are certain exclusions that often are requested in leases. The exclusions should be reviewed, and an experienced lawyer can add value in this section by making sure that the list of exclusions is as comprehensive as it can be.
Real Estate Taxes:
A prospective tenant needs to understand how the applicable jurisdiction collects real estate taxes. Some jurisdictions collect real estate taxes in arrears, some do not. If collected in arrears, the lease needs to state whether the tenant is obligated for the taxes assessed or the taxes due for each year. Most jurisdictions now have real estate tax records online, and the historical tax records should be reviewed, like historical CAM records.
Real estate taxes should not include income, franchise, estate, or transfer taxes. Transfer taxes are an important item to exclude. If the landlord were to sell the property without this transfer tax exclusion, landlord then potentially could pass these taxes to the tenant.
With each lease, the question should be asked – “are there any unique things that need to be considered?” Two states in particular, Florida and California, have unique real estate tax issues. Florida has a sales tax on real estate leases, which is unique to Florida and is paid by the tenant. California restricts the amount by which real estate taxes can increase year-to-year, but the property can be reassessed when landlord sells it. This means that, although prior tax bills might appear reasonable, the future taxes might be much higher if landlord sells the property. There are certain protections that one can negotiate into a lease to limit the risk of this situation.
One of the best things to do with the insurance section is simply to copy and paste it into an email and then send it to the risk manager or insurance representative to review. That person should be able to compare the lease’s insurance section against tenant’s existing policy.
The attorney and insurance representative also should be able to determine if the insurance requirements are reasonable or unreasonable. A lease often will have a boilerplate insurance section that is not entirely appropriate for the particular lease. Automobile, liquor liability, products liability, and completed operations are just a few types of insurance that may be included, even though not applicable to tenant’s business. If these types of provisions are problematic, the negotiation can focus on having those items removed.
It is much easier to deliver certificates of insurance instead of insurance policies. If the lease requires delivery of an insurance policy to landlord, that should be changed in virtually every circumstance to just delivery of a certificate.
These three sections of a lease are particulalry complicated and should be reviewed carefully. The advice and guidance of an experienced broker and attorney can help even a sophisticated tenant navigate these terms.