Your landlord will not contact you to let you know that you are overpaying rent. You must know how your lease works and compare your lease rent calculation mechanism against rent statements annually to ensure that you are not overpaying Additional Rents. Consider the following three factual case studies based on recent client transactions:
A. Our client leases approximately 1,700 square feet of ground floor retail space in a building located in southeast Toronto, from a large Real Estate Investment Trust (REIT). When we originally negotiated the offer to lease additional rent elements were carefully orchestrated to only include certain costs, and be based on an equitable share of the costs shared by the entire building.
When our team reviewed the annual additional rent statement, it indicated that the additional rent was significantly more than estimated during the original negotiation. Examination of the additional rent statement and comparison to the lease indicated that an administration charge of 15 per cent was being added by the landlord to additional rent payable; but the lease did not include the 15 per cent administration charge. The charge resulted in an additional cost annually of approximately $6,000 for our client. We contacted the landlord, whose initial response was that this was a standard charge and was payable regardless of what the lease said. The tenant did not pay this administration fee; the Chief Financial Officer (CFO) of the REIT actually entered into the premises and demanded payment in front of staff and patients, and threatened to lock the tenant out unless payment was received within a certain period of time. Our team followed up with the CFO reminding him that he had violated the tenants’ rights; he offered to “cut a deal” as he had already posted the amounts in the financial statements and could not retroactively correct public shareholders statements. In the end the landlord backed down, removing the costs from the annual statements.
B. Our client leases office space in a mixed-use plaza which had been acquired by a large national Real Estate Investment Trust a couple of years ago. The tenant received a huge additional rent bill and asked us to conduct an audit to discover where these charges were coming from. Our review indicated that the lease clearly states that hydro charges are to be estimated for each new year and paid for by the tenant by monthly installments.
No hydro charges were added by the landlord to the monthly additional rent for two years amounting to an “oversight” of over $12,000.00!
After identifying the issue through an additional rent audit and pointing out the error to the landlord we negotiated a settlement under which the landlord agreed to cover 50 per cent of the cost. Our client will save over $6,000.00 in total.
C. Our client leases approximately 1,500 square feet in a mixed-use plaza in a small town in southwestern Ontario. His landlord is an individual who does not follow what the lease agreement indicates.
As reported in additional rent statements, the landlord “habitually” spends $20,000 each year on repairs and yet the plaza is tired, worn out and in dire need of a facelift. “Coincidentally” repairs for the 2010 and 2011 operating years were only $0.91 apart!! Suspicious?
Janitorial costs went from $1,000 to $2,000 to $19,000 per year over a five year period. Wait a minute, the 2011 janitorial costs were $1,967. Simply add a 0 and presto! You come up with the 2016 annual years’ costs of $19,067! Overall, this year’s common area maintenance costs are almost identical to 2011. Very creative!
How does the insurance cost increase from $10,000 to $12,000 to $25,000 over five years? Shouldn’t a business person shop around for a better rate if they get a 150 per cent increase?
As our client has the option to examine the landlord’s source documents on five days advance written notice, we look forward to reporting on the outcome of our audit.
Does your lease give you this right?
We have hundreds of examples from client files, which go to show that every tenant needs to understand their obligations as well as their opportunities, and how they are being charged for rent. Each tenant needs to know their rights and what their obligations are and how and when they are being billed. You audit your bank statements, why not your lease?
Retaining a highly qualified and experienced lease expert, familiar with the market climate and conditions to review your lease and additional rent installment statements will save you stress, time and money. PA
This article was prepared by Ian D. Toms, B.Sc. (Hons) and Jennifer J. Miles, B.A., HBA, M.B.A., Masters in Property Economics. Realty Lease Consultants, Inc. has been preserving realty leasehold value since 1986 and can be reached at (705) 743-1220, by email firstname.lastname@example.org, or through the website at www.realtyleaseconsultant.com.