Maintenance and Operating Expenses are one of the most confusing and least understood aspects of a commercial lease. Yet they have the most profound financial affect on a tenant’s business.
M&O Expenses can be found in practically all leases. However, language may differ greatly from one commercial lease to another. M&O Expenses are also treated differently when leasing shopping centers, professional buildings, industrial buildings, free standing buildings and medical space. The commercial tenant needs to understand what they are responsible for and how much it will cost prior to signing a commercial lease.
A big problem in leasing space is the inconsistent terminology that is loosely used with tenants being quoted one thing and believing it is otherwise. While it may seem so, there is no such thing as standard “boiler plate” language in these areas, as they are subjective and the language of these provisions will vary greatly form one landlord to another. The landlord has full discretion in the area of operating expenses in a commercial lease, weather it is reasonable or not.
Some leases allow the tenant audit rights regarding the expenses or, the leases may provide for the landlord to present to the tenant, a detailed statement about the increase; however, what detailed means to the landlord may be Greek to the tenant when evaluating the statement. Often times, the tenant will receive the landlords statement, detailed or not and still not understand it. Therein lies the problem; a tenant receives a statement for a significant increase with no clear explanation for it.
It is almost always a certainty that Expenses will increase, however the way a lease is written and modified will greatly dictate the tenant’s exposure. Tenants have the right to ask questions and request changes to a lease document prior to signing, in effort to potentially reduce financial exposure by capping some expenses which a landlord has control of. Conversely, it is in the best interest of the Landlord that questions won’t be raised by prospective tenants and language remains unchanged. Many Landlords rely on the fact, that statistically 90% of tenants that sign leases do so without thoroughly reading and understanding them, which then benefit landlords balance sheets.
Maintenance and Operating Expenses are a major component of the rent to be paid, so it is incumbent upon the tenant to inquire what the rate per square foot is for Expenses and where the money is going. Expenses can vary dramatically from one center or building to another. Some owners will not include real estate taxes when detailing expenses while it is very much a part of a buildings expense and still must be paid by Tenant. Sometimes the numbers just don’t make sense so it is important to be vigilant on this important aspect, take time to read everything and be sure you understand it.