Expert: Jim Avancena, CPM - 3/9/2010

Question
QUESTION: With rent due on the first of each month:
If a lease commencement date is not on the first of a month (lets say 4/15/10) and a lease has yearly rent increases what date will the rent increases take place? Do they bump to 4/1/11 or stay 4/15/11?

ANSWER: Sue:

In my experience most leases contain very specific language regarding your question and I would be surprised if your lease is not clear in this regard.

It is common for a commercial lease to state something like the following:  "If this lease does not start on the first day of a calendar month, then the Lease Commencement Date shall be deemed to be the first day of the first full calendar month following occupancy by the Tenant."

Using your example, the rent increase would usually occur on May 1st.  However, the text of your particular lease should define the determination of the commencement date.

God luck,

-Jim

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

QUESTION: If there is a number shown in the lease as the "estimated pass through charges" of $5 BUT when you complete your budget you are actually projecting a different number, say $5.50 must you allow the tenant to only pay the $5?
We build and sell so many of our leases are done a year or so in advance of the building.

Answer
Sue:

The answer to your question is No.

As long as your lease makes it clear that $5 was "estimated", and your pass through charges accurately justify an expense of $5.50 per square foot, you may bill the tenant for its' share of the overage amount.

I had a very large property once that the owners had estimated pass through charges of $8.00 per square foot in the lease.   In several lease meetings with myself and the landlord, the tenants looked the landlord in the eyes and essentially asked him directly: Are you sure about this "$8.00 per square foot estimate" you included in our new lease for pass through charges?  The landlord answered: "Yes".

The charges later that year were $11.25 per square foot and I had a angry mob of tenants.  I was embarrassed and felt the landlord had been playing fast and loose with the building tenants and myself.  Luckily the landlord realized the tenants were preparing for war and backed down, revising the billing calculations with the tenants paying only $.50 per square foot in overage charges for that year.

Legally I am not certain where the court would have ruled on a pass through estimate that was so very far off.

It is common to have estimated values cited in the lease, however, if your actual pass-through charges are much in excess of the estimated value, I suggest you also provide extremely detailed supporting materials and explanatory notes that allow the tenants to understand why the figures were so far off your original lease estimate.   Note this word to the wise, if those elevated charges contain any ledger expenditures for an all expense paid trip to La Costa for five days for the six representatives of the owner to discuss the up coming years budget and capital planning, I suggest that you reduce the full amount of all the related La Costa charges before you attempt to include them in the pass-through charges.

It is best to shine as much light on the details of the increased pass-through charges every year when you invoice your tenants.

Good Luck.

-Jim