Expert: John Smiley - 10/22/2008

Question
QUESTION: I'm in the process of auditing a lease agreement with our landlord from a sale lease-back arrangement and have a couple of questions that I hope you can help me with.

Q1.  I've noted that in addition to a set management fee, the lease provides that the tenant pay for operating expenses.  The definition of operating expenses includes the "the cost of all salaries, wages, fringe benefits and other compensation paid for the benefit of or on account of the employees, agents, contractors of the landlord who perform services rendered in connection with the maintenance, operation, administration, and supervision of the building and land".

My first question is, whether it is common to pay both a management fee and the salaries and wages of the people managing the building?  It sounds like double billing to me, but since it is in the agreement we may have no recourse.   

The definition of operating expenses also includes " the cost of providing security, supervision, administration & maintenance services for the land and building."
The landlord has been billing us for a portion of their office rent, computer and telephone systems, stationary & supplies, etc..  
My second question is whether these charges would get caught in the definition of operating expenses.  

Any words of wisdom would be appreciated.


ANSWER: Hi Ray,

The answer to your first question is, Yes.  It is very common to pay a management fee as well as all of the other costs.  Given that I have negotiated primarily for tenants, it's not something I'm happy about.  But it's also something that I have rarely had much luck in having changed.

As to your second question, I'm not sure I quite understand.  You say that the landlord has been billing you for a portion of their rent, etc. They're billing you directly?  As a charge above and beyond rental (and additional rent--operating costs) charges?  I'm not sure I understand that.  A portion of those costs (security, supervisions, etc., as well as office rent, computer systems, etc.) is also very common in commercial leases.  Not sure what else to offer without some clarification on what your question and circumstance are.

Feel free to e-mail back with additional information or a re-worded question for the second part.

I hope this helps!
John Smiley

---------- FOLLOW-UP ----------

QUESTION: Hi John,

Thanks for the quick reply.  To clarify and add some more info to my second question. Our landlord has an administration office that is separate from the office building that we lease.  On top of rent and management fees we pay for operating expenses and taxes.  The landlord has been billing us for a portion their office rent, their computer and phone systems, office supplies and stationary, etc as part of operating expenses.  The definition of operating expenses in the lease does not specifically address these type of expenses, but does include "the cost of providing security, supervision, administration and maintenance services for the lands and building".  

We are also charged as part of operating expenses, security, wages and benefits for building and admin staff.

My question is whether it is common in commercial leases for "operating expenses" to extend out to include a portion of the office expenses of the landlord.  I guess one can argue that these expenses are incurred by the landlord to administer the land and building, but it seems rather unreasonable to me.  

Answer
Hi Ray,

Yes, it is very common for leases to include payment for a portion of the landlord's offices as you have described.  If I had my way, this would be removed from leases, but it is indeed very much the norm.

Usually, a lease will explicitly state these additional kinds of expenses.  Given that yours does not, you may have some *very limited* grounds to contest it.  However, I wouldn't expect you to have much luck, to be very honest.

I hope this helps,
John