The definition of recoverable operating costs (additional rent) in most commercial leases includes a provision allowing lessors to invoice tenants, in addition to the actual operating costs of a building, administration fees equivalent to 15% of the total actual costs. The rate and method of calculation may vary from lease to lease. Some leases provide that these fees be, for example, equivalent to 5% of the income generated by the building.
These administration fees are supposed to compensate lessors for the management of their building, the payment of supplier invoices, rent invoicing to tenants and for the remainder of tasks the lessors normally have to perform.
Beware; over the years, lessors have charged to the operating costs of buildings they manage, an increasingly large part of their general overhead costs that they should assume from their 15% compensation, while continuing to impose an administration fee of 15% on tenants. Some landlords go as far as additionally charging tenants another type of fee, referred to as a management fee, for exactly the same service. Some tenants therefore are charged twice the cost for the management / administration of their building, in addition to the general overhead expenses of the lessors.
Indeed, by using very broad and inclusive definitions of recoverable operating costs in their standard leases, some landlords can thus recover substantial additional rent from tenants without improving the quality of services offered to them. This allows landlords to exponentially increase their income while having less and less expenses to cover to generate that income. Here’s what one of those clauses might look like:
The recoverable operating costs include all the direct or indirect costs of maintenance, repair, replacement, security, housekeeping, insurance, public utilities, operation, management, administration, supervision or any other costs related to the building. Without limiting the generality of the foregoing, recoverable operating costs include, among others:
- The cost of photocopies, accounting, office expenses and other administrative costs related to the building;
- An administration fee equal to 15% of all costs included in recoverable operating costs.
Some elements of the example have been underlined to demonstrate the far too broad and evasive nature of this kind of definition, which allows landlords to include in recoverable operating costs an almost infinite range of cost types:
- «direct or indirect»: The indirect costs can be numerous and cover an area that is difficult to define. Where do you draw the line from which a cost no longer qualifies as operating expenses of the building? If we mention that some costs are direct and others not, the intent is clearly to increase the pool of expenses that can be charged to the building operating costs.
- «operation, management, administration, supervision»: For some strange reason, these four words are never defined in commercial leases. For many people, these words are somehow synonyms. The very listing of these words and the absence of their definition, empower landlords to be delusive about these four elements, which may represent four different types of services.
- «Without limiting the generality of the foregoing»: the scope of what precedes this part of the sentence is the opposite of what one might qualify as «limiting». The addition of these words is superfluous and abusive.
- «The cost of photocopies, accounting, office expenses and other administrative costs related to the building»: These costs are general overhead expenses of the landlord and he should assume them in return of any administration fees he receives.
In our next blog, we will see how, during lease negotiations, tenants can reduce their financial exposure to administration fee clauses, by avoiding situations of duplication / multiplication of these costs thus, reducing the risk that lessors see the definition of operating costs as an «all-you-can-eat-buffet».