This is a good news, bad news kind of story.
The good news is that your landlord is committed to improving your shopping center. They want to upgrade the site for current tenants and their customers. To do so, they are planning to re-surface and re-stripe the old, cracked parking lot. This is great news! A new and improved parking lot without gaping potholes will be a big plus in attracting customers to your business.
Now, here comes the bad news: Guess who has to pay for this cost? You and all the other tenants. But how? You don’t own the parking lot- nor were you consulted on pricing and timing.
This story is really about hidden costs in your lease. Landlords try to pass along as many of their operating costs as possible. A landlord’s operating expenses are often called “pass through costs,” as they are passed along to the tenants in proportion to the amount of space they lease.
In the case of the new parking lot, this is considered a landlord’s capital expenditure. As a tenant, you should make sure all Capital Expenditures are excluded from pass through costs in your lease.
Because landlords will try to pass along as many of their operating costs as possible, there is really no limit to the amount of things they may try to make a tenant’s responsibility. There are definitely things that make sense for a tenant to share in the cost of - things like security, lighting, common restrooms, etc. These make sense because the tenant will benefit from these costs as much as the landlord. But make sure you’re paying attention because there can be hidden costs associated with these categories as well.
For instance, landlords may charge a management fee on top of fees already assessed for administrative costs and personnel expenses. So in addition to paying the actual salary for property managers, the landlord is also receiving a percentage charged on top – a percentage that the landlord is profiting from. This fee is of less than mutual benefit.
Unfortunately, pass through costs are not the only category of hidden costs - another category to look out for are Repair Costs. As a general rule, a landlord is responsible for repairing anything outside the leased space (the common areas, the roof, etc.) and the tenant is responsible for repairing anything inside the leased premises. But there are some not so obvious gray areas when it comes to repairs. What happens if a pipe inside a wall needs to be repaired or replaced? Sometimes a lease will exclude this from a landlord’s responsibility even though a pipe is not necessarily inside a tenant’s space.
These repair costs can add up and may not be covered by a tenant’s insurance. Careful attention should be paid to exactly what is and isn’t your obligation as a tenant to repair.
One last category of hidden costs in your commercial lease is called Holdover Rent. This is when a landlord can charge one and a half times or even double your rent if you are still occupying your space when your lease expires. You may even be working with the landlord to secure another lease term, but when it comes time for payment, you’ll see an extra month or two added to your bill. The landlord may not mention this during your lease negotiations - but it's important for a tenant to understand whether holdover rent is a charge included in their lease.
For these reasons, among others, it's prudent to have an attorney review your commercial lease before you sign. Downs Law is well versed in protecting tenants as they enter into what is likely a long term lease. Reach out to us with your questions about your lease today! We’re here for you and can help make sure your business is protected and set up for success.