Decoding commercial leases

Tenants may be on hook for maintenance, property taxes, insurance

Q: I have rented an apartment for many years. I thought I understood the responsibilities of a tenant and a landlord. However, a few years ago I rented space for my business in a commercial office building and I am now finding that my landlord doesn’t seem to have any responsibilities to perform what I consider to be routine maintenance. Under a commercial lease, who is usually responsible for painting, air conditioning units, or even plumbing backups in the sewage pipes? The lease is very long and complicated.

Also, there is a section of the lease that states that the tenants are responsible for "monthly operating expenses," and I am not sure what that means. Can you help me understand commercial leases?

A: Residential leases and commercial leases can be quite different in the responsibilities and obligations of the landlord and the tenant. In residential leases, it is standard and customary to find that the landlord is responsible for all exterior and interior maintenance and repairs with the only exception being if the tenant causes some damage. Even then, the landlord will typically make the repairs and charge the tenant for the cost of the work.

It is very common in most residential leases that the tenant pays a set amount of monthly rent and has no ongoing obligation to do anything other than basic cleaning and routine care of the rental unit.

For example, residential tenants should periodically clean and vacuum and take care of the basic day-to-day upkeep of the residential rental unit and any yard or grounds. If anything breaks, they simply call or send an e-mail to the landlord or their property management firm or maintenance company and the landlord is responsible for ensuring that the proper repairs are made or the item replaced if it has exceeded its useful life.

The responsibilities and obligations of the landlord and tenant often differ with a commercial lease. Some agreements, called gross leases, will have the landlord retaining responsibility for the exterior and most of the interior maintenance of the structure. Sometimes the landlord will even be responsible for some of the day-to-day needs such as janitorial and cleaning. A commercial gross lease is the most similar to a standard residential lease.

However, most commercial leases are not gross leases, but some form of net lease. A net lease is any lease in which the tenant is responsible for some or all of the maintenance or operating expenses of the leased premises or even the entire structure. In net leases, the landlord may require the tenant to handle some of the maintenance and repairs of the building. The tenant in a net lease will often be responsible for certain operating expenses like property taxes, insurance, utilities, property management as well as the maintenance and repairs.

A vague but often used term with commercial leases is a "triple-net lease." Traditionally, a "triple-net lease" is when the tenant assumes the responsibilities for the maintenance, property taxes and insurance of the leased building, and the landlord is responsible only for the exterior shell or overall structure of the building, including the exterior walls, load-bearing interior walls, and the roof and sometimes the parking lot or grounds. These variations are the reason commercial leases are usually much longer and more detailed than a residential lease.

In order to determine who is responsible for what aspects of the maintenance and repair of the leased commercial premises, it is necessary to carefully read the lease. You should never make assumptions about what is the responsibility of the tenant or the landlord without reading the lease. As I indicated, it is often stated that a given lease is a "triple-net lease," but in my experience there are no "standard commercial leases" so the only way to know about a specific issue is to review the lease and any addenda.

These are likely the operating expenses that you are referring to in your lease. If you are in a commercial building where you are the only tenant, then the vendors or suppliers send their invoices or charges directly to you for payment. Some landlords will require a copy or proof of payment so they can be sure that the work is being done and that the property is being properly maintained per the requirements of the lease.

If you are in a multitenant building, these additional operating expenses are part of the overall cost of the upkeep and maintenance of the entire property and are generally referred to as "common area maintenance" — or CAM charges. This is the most universal scenario and the landlord or the property manager is the one that hires, schedules, coordinates and approves the work of the various vendors and suppliers. Then the landlord or property manager compiles all of these expenses that are allowed under each lease and they bill each tenant based on a proportionate share of the total rentable space they occupy at the entire property in the form of additional rent on top of the base rent.

The way CAM charges are billed and collected can vary but the usual procedure is for the advance billing and payment of estimated CAM charges for the upcoming year. A CAM budget is prepared and sent to each tenant along with a calculation of the dollar amount that needs to be paid monthly along with the base rent. Some landlords handle CAM billings on a monthly basis, but the most common is quarterly or annually.

Because this is just an estimate, the actual numbers will vary so it is necessary to perform what is known as a CAM reconciliation at the end of the term. A comparison is made between the CAM charges actually incurred and the amount paid by the tenant as part of the CAM estimated payments. A credit is issued to the tenant if too much was collected, or a demand for additional payment is made if the tenant did not pay the actual charges that are its responsibility. The CAM reconciliation is usually done within 30-90 days after the end of the given quarterly or annual term.

For example, if you have a space with 2,000 rentable square feet in a building with 10,000 square feet of rentable space, then you will be charged and required to pay 20 percent of the CAM charges if you are on a net lease with a clause stating you are responsible for such operating costs. If the total annual CAM charges are $12,000, then you would be responsible for 20 percent of $12,000, or $2,400, which is $200 per month.

If the CAM estimate had billed you only $150 per month for the last year, then in the first quarter of the following year you would be billed the $600 shortfall. Then the landlord will typically send a revised CAM budget for the following year and likely raise it based on the higher-than-anticipated actual CAM expenses in the prior year.

Be sure to read this section very carefully to make sure you understand exactly what you are being charged for. Upon lease renewal look to place some limits on the landlord if you feel that the landlord is not being reasonable.

It is important for the landlord and the tenant to have accurate CAM budgets, as tenants do not want to overpay in advance but they also do not want a large CAM billing after the reconciliation.

I have covered a general outline of commercial leases, but you will need to carefully review your lease or seek the advice of a trusted real estate or legal professional in your area if you still have questions about whether the landlord is passing along proper charges to you.

This column on issues confronting tenants and landlords is written by property manager Robert Griswold, author of "Property Management for Dummies" and "Property Management Kit for Dummies" and co-author of "Real Estate Investing for Dummies."

E-mail your questions to Rental Q&A at rgriswold.inman@retodayradio.com. Questions should be brief and cannot be answered individually.

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