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Lease Audit Extra
FALL 2008
“Grossing Up” Operating Expenses
a reasonable concept that gets lost in translation
In the operating expense provisions of an office For example, occupancy has no bearing on labour
lease you may come across wording that allows or utilities for the lobby, elevators, outside areas,
the landlord to “gross up operating costs which or other common areas. Even vacant leaseable
vary with the use and occupancy of the rentable premises require a minimum of heat in the
premises in the Centre as if the property were winter.
97% occupied and operational.”
A Colliers audit on a 7,000 s.f. office space in
These costs are generally cleaning, waste Ottawa netted a $32,000 recovery for our client.
removal, utilities and management fees if The landlord had applied gross up calculations
based on a % of operating costs. Leases allow to the utilities on vacant space. However, they
these costs to be grossed up to a range of 95% had continued to cool, heat and light the vacant
to 100% occupancy. premises as though they were fully occupied in
order to make the marketing and showing of the
On the surface, allowing the landlord to space more appealing.
charge for more expense than they incur seems
absurd. However, the concept is fair to the Finally, vacant space rarely remains so for a full
landlord – yes, you read that right – and fair year and appropriate calculations are required to
to the tenant. ensure the gross up is applied only to the time the space was
vacant.
An extreme example to illustrate the point:
Assume there are two tenants in a 100,000 sq. ft. office building, REMEDY
Tenant A and Tenant B, who occupy 50% of the space each. Have the ‘right to audit’ written into the lease agreement in
The cleaning costs are $1 per sq. ft. per annum, or $100,000. order to ensure that the grossing up is done correctly. Clear,
Cleaning contracts allow vacancy credits to be given to the concise lease language such as the following is also essential:
landlord if tenant(s) vacate the premises.
“The landlord is entitled to gross up those items of operating
Now let’s say Tenant B vacates the premises for a full year,
costs which vary with the use and occupancy of the rentable
reducing cleaning costs to $50,000. Without a gross up, Tenant
A would now pay 50% of $50,000, equalling $25,000, even premises in the Centre as if the Centre were (% rate to be
though they are responsible for 100% of the cost. The landlord negotiated) occupied and operational. For greater certainty the
would be out of pocket $25,000. Grossing up the cleaning variable costs are cleaning and utilities. In no event shall the
expense to 100% allows the landlord to recover all of its costs. tenant’s proportionate share of the variable expenses be greater
that would be payable if the property had been fully rented.”
Lost in translation
Where this concept often breaks down is in the calculations For Additional Information Contact:
used by landlord administrative staff. We have seen situations Frank Iannarilli
where incorrect calculations have resulted in tenants paying Director, Lease Audit
more on those variable expense items than if the Centre were
100% occupied. 416.620-2876
frank.iannarilli@colliers.com