My first blog dealing with the recharged cost of the electricity consumption to the tenants of a commercial building by a lessor, has demonstrated the importance of applying different allocation rules for the electricity consumption of leased premises from those of the common areas and facilities.
Today, I will reveal what are the most common intentional or non-intentional errors of landlords when invoicing these costs to the tenants.
The non-distinction of electricity consumption
Many commercial leases are silent as to the lessor’s obligations to measure the actual electricity consumption of a tenant’s premises and charge that cost to that same tenant. It is therefore not surprising that the lessor has no motivation to proceed with this measuring and the consequent cost allocation.
Several other leases make a clear distinction between the two types of electricity consumption and the lessor’s obligation to proceed with the measurement and fair allocation of the costs of the consumption amongst the tenants of the building. Despite the unequivocal nature and clarity of these lease clauses, many lessors ignore this obligation and make no distinction or measure of the two types of consumptions. Even worse, tenants often fail to call to order their landlord when they realize they are not being billed for their leased premises consumption.
Consequently, 100% of the electricity consumption of the building is allocated by the lessor to common areas and therefore the entire electricity cost is charged to each tenant according to their proportionate share of occupancy. As I demonstrated in my previous blog, this type of allocation between tenants is generally unfair. In addition, in doing so, the lessor may charge a 15% administration fee (see below) for the full cost of energy, whereas if he had distinguished between the two types of consumption, he would not have been able to charge 15% on the leased premises consumption and make more profit on the tenants’ backs.
Adding an administration fee (15% or other) on the actual cost of electricity
Most commercial leases contain a clause that allows the lessor to charge tenants an administration fee of 10 or 15%, calculated on the total common operating expenses of the building.
As discussed above, if the lessor has not assessed the consumption of the leased premises, the entire cost of electricity will be allocated to the common operating expenses of the building and an administration fee will be calculated on 100% of that cost. In doing so, the lessor will make an illegitimate profit on the part of the consumption which relates to the leased premises.
Even if a lease specifically indicated that the lessor could charge an administrative fee on the consumption of the leased premises, this clause would be illegal and inapplicable because it would be contrary to public order. As I explained in my previous blog, it is illegal to generate a profit on the resale of electricity. This law applies even if the lease states the opposite.
When a landlord makes the distinction between the two types of electricity consumptions, he must charge to each tenant the cost of the leased premises consumption. In order to calculate the cost of the common utility consumption, the landlord must deduct from the total electricity cost, the amounts thus invoiced to the tenants for the leased premises. In other words, he can calculate by difference, the residual consumption that applies to common areas and facilities.
Sometimes, landlords do not deduct from the total costs of the building, the amounts invoiced to the tenants for their specific consumption. In doing so, they recover twice the amount of the leased premises consumption from their tenants; firstly when they invoice each tenant for their specific consumption of their premises and secondly when they invoice all tenants their proportionate share of the total consumption of the building.
Gross-up of the common utility consumption
As I explained in my previous blog, the common electricity consumption of a building generally does not vary or varies very little with the occupancy rate. This consumption must therefore be excluded from the calculation of the gross-up. The gross-up must be applied solely to the electricity consumption of the leased premises.
However, some landlords apply the gross-up on the total electricity consumption of the building, regardless of the fact that the gross-up is not applicable to the common consumption. The tenant is therefore charged with an additional and unjustified rental cost.
Profit on the billing of the leased premises consumption
If a landlord owns a building of a considerable size whose annual electricity consumption exceeds a certain threshold, he can negotiate a preferential rate with Hydro-Quebec for each KWH he uses during the year. This rate is usually substantially lower than the rate a regular consumer, such as a tenant, must pay.
When such a preferential rate applies, often landlords will still charge their tenants for the consumption of the leased premises at the regular rate, thus gaining an illegal profit on the back of the latter. Even if a lease would clearly identify the process and that the tenant would be aware of the lessor’s lower rate, this deal would go against public order and would be illegal.
Inclusion of costs that are excluded from the definition of common utility consumption
In many commercial leases, the definition of common areas and facilities is very broad and includes any space that is not a rental space. In other leases, particularly for retail spaces, this definition is often more restrictive. In this latter situation, it is not uncommon for the lessor to not comply with this restrictive definition. Consequently, he will allocate in common area costs and charge tenants as additional rent, the utility consumption of certain components of the building or shopping center which are clearly excluded from the definition of common areas.
In my next blogs, I will make recommendations to tenants to help guard against undesirable methods of lessors, related to the interpretation of electricity consumption lease clauses. In addition, I will disclose two revealing real-life stories that demonstrate how voracious and dishonest some landlords are in their way of charging tenants the additional rent on electricity consumption.
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