My previous blog, dealing with the costs of electricity consumption of commercial buildings, revealed two real-life cases that demonstrate to what extent some landlords lack of ethics in the way they charge tenants these costs as additional rent.
Here is the last in a series of four blogs dealing with this topic, in which I make my recommendations to tenants to help them guard against undesirable interpretations of electricity consumption lease clauses by lessors.
A clear and precise lease
A lease written in clear and unambiguous language reduces the chances that a lessor make aggressive interpretations of some of its clauses. Regarding the electricity consumption of the building, here are some recommendations that must be taken into account before the lease is signed:
- Ensure that the lease provides for the distinction between the consumption of leased premises and the consumption of common areas and facilities;
- Because they are different, ensure that the rules applicable to both types of consumption are listed in two different sections of the lease;
- Mention in the lease that the lessor will have to charge the electricity for common areas and leased premises at the same rate that he has paid the energy supplier;
- If the lease contains a gross-up clause, specify that the gross-up is not applicable to the electricity consumption of common areas and facilities and that it applies only to the consumption of the leased premises;
- Ensure that the definition of the common operating expenses of the building provides that any amount billed to tenants for the consumption of leased premises is deducted from the total amount of the operating expenses;
- Mention in the lease that no administration fee is applicable and that any profit is prohibited for the lessor in billing the electricity consumption of the leased premises;
- Specify that the electricity consumption of all leased premises for all tenants of the building must be measured separately and invoiced specifically to those tenants;
- Provide a methodology for measuring the consumption of leased premises (such as a sub-meter) and the billing method;
- Include a clause in the lease imposing a reporting mechanism by the lessor and the requirement to produce supporting documents to support billing;
- Insert a clause in the lease that allows you to fully audit all additional rent, including the consumption of the leased premises.
Keep an eye on your landlord
This supervision must be exercised regularly during the business relationship and more particularly:
- When your landlord proceeds to install your sub-meter to measure the consumption of your leased premises, it would be prudent for you to commission your own electrician to monitor the work. I have experienced situations where subsequent meter inspections have shown that the connections were poorly made and that a tenant was charged a portion of the consumption of another tenant;
- Track the billing of the consumption of your leased premises. Make sure you are charged by the landlord for the consumption of your leased premises and require evidence to justify the actual consumption and the rate he paid;
- If the landlord pre-invoices you installments for the estimated consumption of your leased premises, make sure that he makes an annual adjustment between billed estimates and actual consumption;
- Mandate a specialist to conduct a lease audit at least every three years to ensure that the lessor has met his obligations and has billed rent strictly in accordance with the terms of the lease.
Not for all
Apart from the inclusion of an audit clause in the lease and especially the exercise of the right to audit, recommended for all tenants, the above recommendations may be unfavorable to certain types of tenants. In fact, if the type of economic activity you operate in the leased premises results in a greater than average electrical consumption per square foot, compared to the other tenants of the building, it would probably be to your advantage not to have the actual consumption of your leased premises measured and billed separately.
Do you think you are being overcharged for your electrical consumption?
If so, do not hesitate to share your concerns in the space provided for this purpose below. If not, wouldn’t it still be prudent to verify?
Are you about to sign a commercial lease or its renewal?
If so, be vigilant and include a good governance procedure in the process. Let me review your lease proposal to minimize your financial risk with respect to lease clauses that directly or indirectly affect the amount of rent you will pay for many years to come. Tenants and their lawyers consult me in this regard. So why don’t you?