Shared Expenses in a Commercial Lease

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In a commercial net lease, tenants will need to pay more than just the rent. Operating costs, insurance and taxes will be divided up between the landlord and the tenants. When negotiating a commercial net lease, these shared expenses should be thoughtfully negotiated and clearly spelled out to avoid disputes which can be costly.

Since these expenses are often a very large part of the overall cost of the lease, tenants would be wise to carefully negotiate every single expense. The big ones include:

Maintenance/Operating Costs. Tenants and landlords will need to negotiate what maintenance and upkeep "passes through" to the tenants, and what is paid by the landlord. Additionally, in multiple tenant buildings, tenant expenses will need to be divided between the tenants.

Property Tax. Taxes are similarly divided between tenants and the landlord, but there are many different ways to calculate who pays what.

Insurance. Both landlords and tenants will want property and casualty insurance (to protect the premises and property) as well as general liability insurance (in the case of injury to an invitee to the property). How these insurance costs are allocated is all negotiable.

The articles below discuss in detail the options for dividing shared expenses among the tenants and the landlord.

Dividing Tax Expenses

Death and Taxes, the two certainties in life. In a commercial lease, tax expenses will need to be paid by one or all parties.

Allocating Tax Expenses Between the Landlord and Tenant
A common way to place tax responsibility on the tenant is for the landlord to agree to pay all real property taxes for the first year of the lease (sometimes called the "base year"). Then, after the first year, you pick up all or a portion of any increase.

Allocating Taxes Among Tenants
When you negotiate with the landlord over how taxes are allocated among tenants, remember that it must be the same for all tenants in the building. The landlord will be constrained by the terms of the leases already in place with other tenants.

Dividing Insurance Costs

Every landlord and tenant will need to have insurance to protect the property and cover any potential liabilities.

Allocating Insurance Costs Among Tenants
The simplest way to divide up insurance costs is to allocate them according to the size of each tenant’s space—the tenant who rents 25% of the building pays 25% of the insurance costs. This method works fine as long as the tenant mix is composed of similar types of businesses whose spaces are more or less equal, value-wise.

Sharing Liability Insurance Costs Fairly Among Tenants
If you’ve read about how to fairly share taxes and property and casualty insurance, you may recognize this problem as similar to the ones encountered there, where the building had a wide variety of tenants, and one tenant’s expensive improvements(or risky business) added insurable risk to the property, which all tenants have to pay for in the form of insurance premiums.

Building Operations: Maintenance Expenses

Operating the building itself has inherent expenses, from maintenance, janitorial services and landscaping. The commercial lease should spell out who covers these costs.

Dividing Maintenance Costs Between Landlord and Tenants
There is an operating cost to maintain the building’s upkeep. You may also be asked to contribute a proportionate share for the building-wide air and heating costs. If you lease space in an office building, there may be an added management fee, which will cover the cost of the building’s superintendent or the monthly amount the landlord pays a management company to run the building.