Industrial Space Operating Costs Reconcilliations – A Lesson To Learn for Calgary Industrial Tenants and Landlords

Mar 18, 2011 by

Interesting how a relationship between a Tenant and a Landlord that starts off as a great relationship gets  soured so fast by a lack of communication between the parties. I recently had an opportunity to sit in a meeting between a very good client of ours and his Landlord. The Landlord was attempting to collect 4 years of additional Operating Costs, that he had not billed the Tenant for. As you can imagine it was a very heated conversation.   The lease in this case is what is often referred to as a “care free lease”.  This is where the Tenant pays directly to the supplier each and every item that is required to maintain the property except in this case all necessary insurance and property taxes that the Landlord was collecting and paying to the necessary parties.   It is still a triple net lease for the Landlord but is is essentially “care free” as he has to be responsible for little or no maintenance items.

In this instance the Landlord however had agreed to “collect” operating costs for certain items relating to maintenance of the building in addition to insurance and property taxes.  There was correspondence between the parties that lead the Tenant to understand  he had certain responsibilities under the lease and the Landlord had certain responsibilities. Again as a result of charging portions of the Operating Costs there was an implied assumption that the Landlord was paying the supplier for these items. Under the letter of the law in this particular lease, a triple net carefree lease, the Tenant was responsible for all costs relating to the property except for property taxes and insurance which had been expressly excluded and were the responsibility of the Landlord under the lease.  But, contrary to the lease the Landlord had agreed to collect for certain additional items.  Now the quandry.  Which applies, the Lease or the correspondence between the parties?

This particular Tenant had received correspondence early in the relationship that indicated the Landlord was charging Operating Costs for mechanical services, exterior maintenance of the building, landscaping and several other items that were included as standard Operating Costs. The gray area was created as a result of the Landlord not enforcing the terms of the lease as a care free lease and charging for certain other costs in maintaining the building.  The additional verbal communication that had gone on between the parties whereby the Landlord had allowed the Tenant to incur certain cost outside of those Operating Costs also muddied the situation. There was never any written clarification as to what costs were the responsibility of the Tenant and what costs were the responsibility of the Landlord.

The result? We have a soured relationship between the parties, that will eventually end up in a situation where the Tenant will likely vacate the property, the property still works very well for them but the Landlord will have a situation where they are unable to retain the Tenant as a result of the bad feelings.

What is the moral of the story?  Always ensure that there is good communication between the Landlord and the Tenant, particularly relating to who has responsibility for what costs. As a Tenant, always ensure that your Landlord is completing an annual reconciliation of those costs that have been incurred as part of Operating Costs.   If you have a completely carefree Lease, where you are taking care of all items related to the operation of the building always  make absolutely sure that you get it in writing confirming from the Landlord confirming  who has responsibility for which items.  The attached form is something that we use in our property management packages that outlines this clearly and includes which clause in the lease outlines the requriement to pay the said cost.

Please contact us if you have any further questions or comments.