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Did I agree to Pay for That? A Primer on Additional Rent.

The market trend in Commercial Leasing is toward “net” leases, which means the tenant agrees to pay the landlord a “base” or “minimal” rent plus additional rent to make up the gross rent. This breakdown enables the landlord to advertise and negotiate a space based on a very competitive and attractive base rent while quietly drawing attention away from the estimated, and often higher value, of additional rents. Surprisingly, some landlords will intentionally make additional rent difficult to define and understand, allowing them to pass along inappropriate expenses to their tenants.

It is appropriate to pay additional rent provided you receive your proportionate value. Unfortunately, not all Tenants get good value for their additional rent dollar. The share of costs may not be equitably allocated. For example, that nice big drug store or grocery store in your plaza probably pays reduced additional rent with the other tenants making up the difference in their “proportionate share”. Vague language may be used to define additional rent which enables the landlord to include virtually anything in the costs they charge tenants. As an example, additional rent statements can reveal duplicate items, personal costs (we have seen Landlord’s income tax payments and clothing allowances!), and costs that should be the Landlord’s responsibility, such as capital taxes.

You pay the estimated monthly installments and at the end of each year, your Landlord tallies the actual cost to manage and maintain their property. This informs a projection as to what the costs for the upcoming year might be. Following this review, most Landlords will provide Tenants with an Additional Rent Reconciliation Statement showing any difference between the estimated and actual costs. Your base rent is already determined by your lease documents so, unless there is a large spike in additional rent costs, the projected amount is not likely to cause undue concern. The Reconciliation Statement for the expiring year is the report you want to pay attention to.

The Reconciliation Statement compares what you paid in additional rent over the course of last year in “installment payments” to the Landlord’s actual management and maintenance costs. In the case of a low estimate, you may be required to make a payment to cover an outstanding balance. In the case of a high estimate, the Landlord may reimburse you for an overpayment. The latter occurs far less often than the former.  

How do you know what you should be paying? How do you verify the amounts? And how do you confirm which costs are relevant? Easy! It’s in your lease. Your lease spells out the “what” and “why” of each cost you are being charged and defines what your share (proportionate vs. allocated) of each cost is. If your space is 1,000 square feet in a 10,000 square foot plaza then your proportionate share of the costs should be 10%. If you are governed by an allocated share of the complex, this calculation will be spelled out in your lease. An additional rent audit will determine if your additional rents are being calculated correctly and in accordance with your lease. 

Has your square footage been verified and agreed to? Even a minor miscalculation can add up to  thousands of dollars over a five or ten year term. What does the lease say you are required to pay for? We have seen reconciliation statements that include a “management fee” or “maintenance fee” when the lease contains no reference to, or definition of, either charge. In one case this translated into an additional charge of $5,391.39 for just one year. Do the math and calculate the cost to the tenant if that had been allowed to carry on for the 10 year duration of their current term.

Landlords may not charge for anything other than what was agreed to in the lease. Ever.

During the Offer to Lease phase, the components and share of additional rent can be negotiated, but don't give up just yet if your Lease is already in place. A quick check of your Lease and Additional Rent statement may reveal an opportunity for savings. You can take action and save money by looking at the additional rent statement costs to see if they are correct according to your lease.

Looking at Additional Rent while negotiating a new lease

The key to effectively managing your position is to clearly describe each additional rent component, how your proportionate share calculation works, and to take the opportunity to audit your landlord’s books.

  • Make sure you understand, define and cap or collar all additional rent items.
  • Ensure the defined costs include only your (allocated or proportionate) share of appropriate expenses.
  • Make sure the landlord agrees to provide copies of, or access to, receipts for all costs together with annual additional rent statements and agrees that you have recourse if any items do not correspond to the lease.

Looking at Additional Rent while administering an existing lease

Even when significant changes to additional rent share or components in your lease are not possible, there are several approaches to managing your Additional Rent to prevent overcharge.

  • ‍Check the additional rent provisions expressed in the lease against your additional rent statement.
  • ‍Challenge your landlord about any items that seem unreasonable.
  • ‍Be prepared for the Landlord to be resistant.
  • ‍Look forward to your next Lease Term Renewal Negotiations which will provide an opportunity to address inequitable additional rent provisions.

Additional Rent Checklist

  • Is your premises area correct?
  • Is your proportionate or allocated share of additional rent calculation correct?
  • ‍Are you being charged for any costs you did not agree to pay for under the Lease?
  • ‍Look at the municipal tax bill, make sure it's for your property, apply your proportionate share calculation and then cross check to what the landlord charged.
  • ‍Make sure the landlord’s insurance cost for the property is a reasonable market rate, and that you are being charged the correct proportionate or allocated share.
  • Check that the repair and maintenance costs, including common ones such as snow removal and landscaping, are reasonable.
  • Is the administration fee being charged on all, or a subset of, the additional rent costs? Does the math line up with the lease?
  • Make sure the Landlord is using timers to turn off signage during daylight hours.
  • Encourage the use of computerized thermostats, window shades, thermally efficient glazing, high-efficiency lighting, and high-efficiency heating and air conditioning systems. Ask your landlord if these have been investigated - they could save you $2-$3 per square foot.
  • Make sure that utility (hydro, gas) use is being monitored. Since they are often a pass-through cost, they are not monitored by either landlord or tenant. We have seen some outrageous overcharges.
  • ‍Consider installing a check meter if your utilities are not separately metered to avoid paying for another tenant’s overuse.
  • If your baseboard heaters and your air conditioning are BOTH running at full capacity at the same time, you are overpaying.  

An annual Additional Rent reconciliation audit is recommended. An audit can be conducted anytime you receive an additional rent invoice that you question, but the best time to conduct an audit is when you receive your reconciliation statement in December or January. During an audit, we carefully compare your statement to your lease document to ensure you are only paying what you should be paying. We will generate a report to highlight areas of concern and make recommendations on how you might address these with your Landlord now and in the future.

Written by
Ian D. Toms