Operating Expense Exclusions: Sample Provision

• Real Estate Leases

As a follow-up to our post on Operating Expenses: Cost-Saving Exclusions for Tenants, we are posting a sample provision for the exclusion of specified expenses from a shopping center lease.  The category of exclusions will change based upon the type of property being leased (office, industrial, etc.) and the state in which the premises are located.  A landlord's receptivity to proposed exclusions will vary based upon general market conditions, the size of the lease and the type of property being leased.  You should not use this sample provision in a lease without first obtaining advice from a qualified commercial real estate attorney.

Sample Provision: Notwithstanding anything to the contrary contained the Lease, or elsewhere, "Operating Expenses" shall not include the following expenses, which are intended to function solely as an exclusionary listing and shall not be interpreted to permit or authorize any cost of expense which would not otherwise be considered to be a operating expense under the other terms and conditions of this Lease:  (a) any bad debt loss, rent loss or reserves for bad debts or rent loss; (b) Landlord's brokerage fees or commissions, finder's fees, architect’s fees, space planning costs, attorneys' fees, administrative fees and other costs incurred by Landlord in connection with leasing, subleasing, assigning or attempting to lease, sublease or assign space or operate concessions on the Shopping Center; (c) costs of design, entitlement, site preparation, planning, marketing, construction and/or acquisition of buildings, additional land or any expansion of or major physical change to the Shopping Center or the Shopping Center; (d) acquisition and installation costs of capital improvements, repairs or replacements to any portions of the Shopping Center which may be properly capitalized rather than expensed in accordance with generally accepted accounting principles, except that amortization on a straight line basis over the useful life thereof shall be permitted with respect to capital improvements, repairs and replacements and with respect to machinery and equipment acquired after the Rental Commencement Date to the extent otherwise specifically permitted herein, both with interest on the unamortized portion at the WSJ Prime Rate; (e) costs for equipment or machinery incurred by Landlord after the Rental Commencement Date unless same are reasonably anticipated to effectuate an annual reduction in Operating Expenses greater than the annual expenses thereof to be included in Operating Expenses pursuant to the other terms and provisions hereof; (f) interest, principal, points and fees on debt or amortization on any mortgage, deed of trust or other debt secured or unsecured by the Shopping Center; (g) costs, including, without limitation, permit, license and inspection costs incurred with respect to the installation or maintenance of tenant improvements for other tenants in the Shopping Center, or incurred in demolishing, renovating or otherwise improving, decorating, painting or redecorating space for tenants or other occupants of the Shopping Center, including, without limitation, space planning and interior design costs and fees and the costs of any "warranty" work or replacements; (h) real property taxes paid and maintenance performed on separately assessed and/or maintained "out parcels", if any; (i) any dues or charges for professional associations of property owners, managers or tenants in the Shopping Center; (j) repairs or replacements to any utility systems that are dedicated to the use of a single other tenant; (k) amounts paid for goods and services to any persons or entities related to Landlord in excess of the prevailing cost of such goods or services from competitive unrelated sources; (l) any cost which is the responsibility of any utility company, governmental agency, or other third party to the extent such cost is reimbursed to Landlord from such company, agency or other third party, or to the extent such cost is reimbursable but Landlord has failed to seek such reimbursement with due diligence; (m) reserves for future expenses beyond current year anticipated expenses; (n) any costs or expenses, which are reimbursed by insurance or for which Landlord is otherwise, compensated (other than indirectly through rent payments) or for which Landlord has a right to payment or reimbursement from a past or present tenant of the Shopping Center; (o) all interest and penalties incurred as a result of Landlord's failure to pay bills as the same becomes due; (p) the cost of insurance on other tenants' leasehold improvements (unless the cost of such insurance on Tenant's leasehold improvements is also included within operating expenses), or any cost or expense for which insurance reimbursement would be available but for the decision of Landlord not to make or pursue a valid claim thereon; (q) charitable or political contributions; (r) Attorneys' fees, accountants' fees, arbitration fees and other costs and expenses incurred in connection with (i) any audits conducted by any past or present tenant; (ii) any existing or prospective leasing, lease renewal, lease termination, lease modification or other negotiations; (iii) disputes with employees, present or prospective tenants or other occupants of the Shopping Center, or their assignees or subtenants, lenders or ground landlords; (iv) the violation or alleged violation by Landlord or any other tenant of the Shopping Center of the terms and conditions of any lease of space on the Shopping Center, or (v) the violation or alleged violation by Landlord or any other tenant of the Shopping Center of any Applicable Laws; (s) costs associated with the operation of the business of the entity which constitutes Landlord, as such costs are distinguished from the costs of the operation of the Shopping Center, including, accounting and legal matters, marketing, costs of selling, syndicating, financing, mortgaging or hypothecating any of Landlord's interest in the Shopping Center or the entity constituting Landlord, advertising and promotional expenditures or costs of signs in or on the Shopping Center identifying the owner of the Shopping Center or other tenants' signs; provided that costs associated with the maintenance of monument signs used for the benefit of all tenants of the Shopping Center shall be a operating expense; (t) any ground, underlying or masters lease rental or other payments; (u) expenses in connection with services, repairs or other benefits which are not offered to Tenant, or for which Tenant is charged directly but which are provided without charge to another tenant or occupant of the Shopping Center, and costs for which tenants contract directly with the applicable service provider, and costs of providing any special or extra service to any tenant; (v) capital expenditures required by applicable laws; provided, that such expenditures may be amortized over their useful life with interest at the WSJ Prime Rate and included in the Operating Expenses (w)  any cost incurred in connection with any asbestos abatement or compliance with any violations of the Americans With Disabilities Act or Title 24 that existed prior to the Rental Commencement Date or which are required as a result of a specific tenant’s use of its premises; (x) any compensation paid or costs incurred in connection with commercial concessions operated by Landlord; (y) any recalculation of or additional operating expenses for periods prior to the immediately preceding calendar year; (z) estate, inheritance, capital stock, sales, use, gross receipts, business, corporation or franchise taxes, fees or penalties or any related attorneys' or accountants' fees; provided that notwithstanding the forgoing, Teannt shall pay for rental income taxes; (aa) documentary transfer taxes or other taxes imposed in connection with the sale, transfer or financing of the Shopping Center or any interest therein; (bb)  any real property taxes which, although currently payable, relate to previous periods (such as "escape assessments"); (cc) any penalty resulting from nonpayment or underpayment of "real property taxes" or other taxes or failure to file any tax returns when due; (dd) costs for acquisition, maintenance, repair or insurance of sculpture, murals, paintings or other objects of art; (ee) rent for space occupied as a property management office, if any, to the extent such rent exceeds the fair market rental for such space or to the extent the space utilized therefore materially exceeds the average space so utilized by comparable buildings; to the extent such management office is used for other purposes, including, without limitation, leasing activities, the rent and other charges associated with such office shall be prorated in an equitable manner; (ff) costs arising from the gross negligent or willful misconduct of Landlord, its agents or tenants of the Shopping Center, and costs incurred due to the violation by Landlord prior to the date of this Lease of any law or the terms and conditions of any lease of space in the Shopping Center; (gg) new or additional landscaping (other than normal plant replacements); (hh) costs incurred for the repair of damage or destruction or eminent domain/taking governed by the destruction and condemnation provisions of the Lease; (ii) costs of meals, beverages and bottled water; (jj) Automobile or travel expense for Landlord or its agents; (kk) costs incurred to investigate or remediate hazardous substances not released by Tenant, and (ll) on no event shall Landlord bill Tenants of the Shopping Center in the aggregate for more than the cost actually incurred by Landlord for any item of operating expense.

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Disclaimer:  This commercial real estate law article is provided  for general education purposes only.  The information should not be relied on as legal advice for your spcific commercial real estate lease issue, nor does it serve to create an attorney-client relationship. Laws vary from one state to another. For legal advice on a specific matter, consult a qualified commercial real estate attorney