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Negotiating Language in Lease Escalation Clauses Can Save Tenants Thousands

Negotiating a new lease with a landlord can be a daunting task for any manufacturing and distribution company – but if you’re savvy about what language to include (and exclude) in the lease, you could save thousands of dollars over the term of the agreement.

In addition to base rent charges, it is standard for a landlord to also incorporate certain expense escalation clauses over an initial base year amount into the lease agreement.

Such expense escalation clauses typically include, but are not limited to the tenant’s repayment of its pro-rata share of:

  • Real estate taxes
  • Common area maintenance
  • Insurance

These lease escalation clauses can be complex but a tenant should be aware of such charges and the impact they could have on the total monthly rental payment in later years of the lease. Knowing what language to include or exclude in the lease could save a tenant thousands of dollars over the related term of the agreement.

For example, landlords typically use different escalation clauses for each of their numerous tenants, so it’s possible that a landlord is incorrectly calculating the specific terms of a tenant’s expense escalation agreement. Since this happens fairly regularly, tenants should make sure that a clause is inserted into the lease allowing them to inspect the landlord’s books and records as well as the calculation of the expense escalation charges being assessed.

The tenant should also ensure that they have a reasonable amount of time to review the information and calculation obtained. Should the tenant disagree with the amounts being assessed, they should make sure the lease gives them the right to bring in an independent certified public accountant or a firm specializing in the audit of leases to review the information. The clause should also specify that the landlord incur the cost of such fees if it’s proven that the landlord is in error.

Tenants should also insert into their lease a clause that gives them the right to receive a proportionate share of any real estate tax refund the landlord receives. Most landlords contest their real estate tax assessments on a yearly basis. In order to get a share of a refund in the year that the landlord successfully challenges and receives a real estate tax refund, the tenant must ensure that they have a provision in the lease that entitles them to their proportionate share of the real estate taxes they previously paid to the landlord. Failure to include such a simple clause would result in lost money owed back to the tenant.

These are just a few examples of the clauses that can be inserted into a lease to protect the tenant. There are many pitfalls a tenant can fall into when signing a new lease by not knowing what language to include or exclude from a lease agreement. A tenant should always consult with a CPA before signing any agreement.

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