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In the Spotlight: Beware of Operating Expenses Incurred Subsequent to the Lease Term
Most leases that provide for a pass-through of operating expenses to tenants provide for an equitable proration of such expenses for any partial lease year. The typical language provides that the tenant is liable for its proportionate share of operating expenses incurred by the landlord for any period during the lease term. The arithmetic is very simple ' if the lease expires on March 31st, the tenant is responsible for its share of expenses incurred by the landlord through March 31st. Some leases, however, have a more ambiguous, and from the tenant's perspective, troublesome, proration clause that provides in effect that the tenant is liable to the landlord for its share of all operating expenses incurred by the landlord during the entire calendar year during which the lease expires prorated on the number of days or months of the lease term during such calendar year. So if the tenant's lease expires on March 31st, and the landlord incurs a significant operating expense in September, the tenant is liable for one-fourth of its share of such expense, notwithstanding that the expense was incurred and paid subsequent to the end of the lease term. These provisions may often work unfairly to the landlord's advantage and the savvy tenant should carefully vet and negotiate any such clauses before executing a lease.
William R. Crowe is a partner at Mayo, Gilligan & Zito, LLP in Wethersfield, CT.
Most leases that provide for a pass-through of operating expenses to tenants provide for an equitable proration of such expenses for any partial lease year. The typical language provides that the tenant is liable for its proportionate share of operating expenses incurred by the landlord for any period during the lease term. The arithmetic is very simple ' if the lease expires on March 31st, the tenant is responsible for its share of expenses incurred by the landlord through March 31st. Some leases, however, have a more ambiguous, and from the tenant's perspective, troublesome, proration clause that provides in effect that the tenant is liable to the landlord for its share of all operating expenses incurred by the landlord during the entire calendar year during which the lease expires prorated on the number of days or months of the lease term during such calendar year. So if the tenant's lease expires on March 31st, and the landlord incurs a significant operating expense in September, the tenant is liable for one-fourth of its share of such expense, notwithstanding that the expense was incurred and paid subsequent to the end of the lease term. These provisions may often work unfairly to the landlord's advantage and the savvy tenant should carefully vet and negotiate any such clauses before executing a lease.
William R. Crowe is a partner at Mayo, Gilligan & Zito, LLP in Wethersfield, CT.
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