Our mythical business owner, Harry Hardworker, owns a coffee shop in a commercial building. Harry’s coffee shop operates under a triple net commercial lease, meaning that Harry pays a set amount in base rent, and additionally pays a proportional share of taxes, insurance and operating expenses associated with the building. In relation to those operating expenses, Harry’s lease states: “Tenant shall pay to Landlord, as additional rent, monthly, in advance on the first day of each month during the lease term, an amount equal to one-twelfth (1/12th) of Tenant’s share of the operating costs of the property for each calendar year during the lease term as reasonably estimated by Landlord.”
Harry’s landlord, Frank Familyman, has owned the building for years. Frank, true to his name, is a true family man – always making sure that his extended family is well-cared for. Frank’s son-in-law, Billy Iwatchtvalot, has never been particularly ambitious. Frank has long believed that Billy has been underemployed and hasn’t supported Frank’s daughter and their family in the way Frank believes he should. Accordingly, Frank developed a creative solution whereby Billy works as the property manager at his commercial building, a role that Frank had previously filled without taking a salary. Billy sits in the office for roughly six hours each day, drinking beer and watching two televisions showing security camera footage and, also, a television showing ESPN. All building-related work in relation to accounting, bookkeeping, marketing, property maintenance, tenant relations, etc. is handled by outside vendors at additional costs. Billy receives a salary of $230,000 annually for his “services” as property manager and has been able to provide for his family on a much more consistent and comfortable basis. Frank is immensely satisfied with this solution, because the commercial tenants all foot the bill for Billy’s salary as part of the building’s operating expenses.
Harry’s proportional share of the building’s operating expenses pursuant to his lease agreement was five percent. After Billy assumed the role of property manager, Harry’s operating expenses increased by nearly a thousand dollars a month with no explanation. As a small business owner, this increase caused Harry tremendous financial stress. He repeatedly tried to call and email Frank to find out the reason for this increase in rent, but Frank never responded. Harry had no idea that Frank had hired Billy. None of the tenants had ever seen Billy, since Billy simply sat in a back office with the door closed, drinking and watching television without venturing out into the building. They had all assumed that Frank was just spending additional time in the office. Finally, Harry saw Frank exiting the elevator in the building’s lobby, and ran over and confronted him. “Frank! I’ve been trying to reach you for weeks, but you haven’t responded. Why has my rent been jacked up so high? Come on, man. You know I run a small shop. How in the world am I supposed to pay for all of this?” Frank shrugged, “You are paying your fair share of the building’s operating expenses. I’m not required to give you any information about this. You better keep paying, or else you’ll in be in breach!”
Thankfully, Harry had worked with his business attorney in negotiating his commercial lease. Harry called his lawyer, Sally Superstar, and explained the situation to her. Ms. Superstar said, “Oh Harry, that isn’t true. There is indeed something you can do about those out-of-control operating expenses! First of all, the lease gives you audit rights. So, actually, Frank is in breach of the lease if he claims that he is ‘not required to give you any information’ about the building’s expenses. You have a right to audit the records related to the costs that are being charged as part of your share of the rent and find out what’s going on. And, don’t you remember? The lease indicates that, if you can show that the building’s operating costs exceeds competitive costs for similar services in comparable buildings located within five miles of your building, then Frank cannot charge those excess amounts as part of your operating expenses!”
Harry, relieved, asked Ms. Superstar to follow up. Ms. Superstar promptly requested an audit. Frank, panicked, then consulted with his business attorney, realized that he was in a bad position and, with much sadness, terminated Billy’s cushy employment arrangement.
Do you have any questions about your commercial lease’s requirements regarding the building’s operating expenses? We’ll be happy to help!
This post is for informational purposes and does not contain or convey legal advice. The information herein should not be used or relied upon in regard to any particular facts or circumstances without first consulting with an attorney.