In the Spotlight: Crafting Carve-Outs to Tenant's Obligation to Pay Operating Expenses

Most tenants and/or their lawyers have lengthy lists of favorite carve-out items. Some may be quirky, such as art and holiday decorations; some are basic, such as expenses incurred in connection with the lease-up of rentable space. Landlords of course have their “must have” inclusions. The net result of the differences in opinion can be a lengthy and particularly tedious negotiation.

One of the most expedient ways of cutting through the thicket of what gets excluded from operating expenses is to agree upon an annual cap on increases. While generally available only to significant tenants, a typical lease provision would provide that the tenant's proportionate share of the operating expenses for any lease year will not exceed 105% of the expenses for the preceding year. Landlords must be careful when agreeing to any such cap to carve out specifically variable expenses over which they have no control. The two most significant carve-outs would be winter maintenance and insurance expenses. Other popular carve-outs include labor and fuel expenses. These variable carve-outs should also apply in any instance where a tenant has negotiated a cap on the operating expenses for the first lease year.

Much ink, thought, and aggravation have gone into crafting carve-outs to a tenant's obligation to pay its proportionate share of operating expenses. Depending on the relative leverage of the parties in the deal, the tenant may get significant concessions from the landlord, including carve-outs for capital items and other potentially costly expenditures.