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Switching to Fixed Operating Costs
These days, it has become very common for retail landlords to charge retail tenants “pass through” costs such as operating expenses, insurance costs, taxes, and marketing costs on a fixed cost basis with mandatory fixed increases as opposed to charging tenants a proportionate share of the actual amounts for these charges. The advantage for the landlord to provide these costs on a fixed basis with fixed increases (“Fixed Costs”) is to reduce costs for accounting, reduce or eliminate tenant audit rights, and perhaps be able to make a profit, if the Fixed Costs exceed the actual costs incurred by the landlord for these expenses. The advantages to the tenant for paying these Fixed Costs (instead of a proportionate share of these expenses) is that it allows the tenant to budget for these costs with an absolute certainty as to what these costs will be in the future; it reduces accounting and audit costs, and protects the tenant in the event certain “uncontrollable costs” (e.g., taxes, energy costs, etc.) greatly increase in the future, since this risk has now been assumed by the landlord.
However, there are certain issues that a tenant should consider before agreeing to switch from paying these “pass through” expenses on a proportionate share basis to paying for these expenses as part of Fixed Costs. Among those issues that should be considered by the tenant are what expenses should be included in Fixed Costs, what expenses are excluded from Fixed Costs and how the Fixed Costs will be escalated over time.
What Expenses Are Included in Fixed Costs
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