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Three Tenancy Cost Increases to Watch For

Vague language in your lease agreement increases your risk of unexpected cost increases. Three of the more significant ways your tenancy costs may increase without any changes to your lease document or your base rent are through Assignment Fees, Parking and Additional Rent. The language in your Lease can help limit these increases or provide you with grounds to dispute them.

Assignment Fees

When you assign your lease, the landlord will incur some legal and administrative costs to qualify the prospective assignee as well as to draft and administer the transfer documents. Most leases will include a requirement that the tenant pays these costs. Typically, fees can range from $750 to $5,000.

Case Study:
A client received an unsolicited offer to purchase his newly built dental practice and decided to accept the offer. One of the conditions of the purchase offer was that the lease would be assigned to the purchaser. The lease says that the landlord would not unreasonably withhold consent to assignment, provided that the tenant pays a “standard transfer processing fee”. Until recently, this landlord interpreted the “standard transfer processing fee” to be $3,500. In this instance, the landlord interpreted this fee to be five per cent of the purchase price. For this transaction, 5 per cent of the purchase price equaled $185,000 plus sales tax! This landlord used a convenient interpretation of vague, industry standard lease wording to justify this fee.

Can a landlord extort a percentage of the sale price on transfer according to typical lease language? Each tenant’s exposure will depend on how the transfer passage in the lease is worded, how the wording is interpreted at the time, and how the legal system interprets this wording. This matter is very important to all tenants as it sets a precedent. To avoid this trap, be sure that during lease negotiation the fee a landlord can charge to “process” your assignment application is clearly defined.

Pay Parking

Some properties require patrons to pay a nominal fee for parking. Patrons of the tenant are rarely inconvenienced as these parking facilities always have spaces available and tenants in these properties may have a practice of reimbursing the parking fee to their clients. When a landlord increases parking fees it can have a significant impact.

Case Study:
One dental clinic reported a six month increase in parking fee reimbursement that exceeded the amount of their base rent! With a significant increase in parking fees, a tenant is faced with three choices: leave the building, absorb the increased cost, or stop parking reimbursements and risk losing clients.

It is very important to recognize that occupancy cost consideration can include base rent, additional rent and parking cost reimbursement. If your building is not currently subject to pay parking, make every effort during your lease negotiation to ensure that your parking will always be free. In properties with pay parking, work to cap or otherwise manage this cost. Finally, understand that although some buildings do not charge for parking, their base or additional rent may be higher to compensate. In other words, you may already be paying for that “free” parking in your base or additional rent.

Additional Rent

Base rent values are clearly described and agreed to many years in advance, so the pressure on landlords to increase revenue is focused on additional rent. What additional rent includes is often not clearly defined and is therefore subject to interpretation.

Case Study:
One client reports that while their base rent has hardly changed over the past 10 years, they have experienced an additional rent increase of 78 per cent over the past five years. That’s an average annual increase of 15.6 per cent. The lease wording has not changed, only the interpretation of what the lease says. If the language in your lease is clear it may support you in a dispute over the costs included in your additional rent. In this case, the landlord has indicated that it intends to continue charging for items that were specifically excluded from additional rent and the tenant will need to make a legal claim to enforce the lease.

Again, during lease negotiation, you need to clearly identify what costs can, and cannot be included in additional rent. You need to include a provision that allows you to review additional rent source documents and a provision that provides recourse if any costs included in additional rent are unjustified.

Written by
Ian D. Toms