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Wins & Insights

Tenant Leasing Illustrated – Sep 2012 – Gold Medals and Electricity Rent Inclusion

Gold Medals and Electricity Rent Inclusion

I love the Olympics, particularly the more offbeat events, such as weightlifting and kayaking. And you have to love the referees disqualifying badminton teams for trying to lose (lucky there is no such thing in baseball or my Mets would be suspect!).

Maybe it is just that the Olympics bring me back to my beloved water polo.

Actually, the link is pretty tenuous. A few years ago, at the Bat Mitzvah of a friend’s daughter, my teenage sons decided to have some fun with two of the guests who were nice but somewhat overzealous triathletes from Colorado by telling them, unbeknownst to me, of their dad’s storied water polo career.

I could not understand why the two kept discussing training and swim workouts with me. At least, before being let in on the secret, I managed to go vaudeville and tell my triathlete friends that although I love water polo, I had to give it up because my horse kept drowning.

As with my water polo career, there are certain aspects of a lease that are not what they might seem at first. A good example is the electricity rent inclusion provision.

Every space needs electricity and this electricity can be provided by the landlord or the tenant. Electricity provided by direct meter from the utility to the tenant is the fairest method for tenants, but direct meters are more common in retail spaces than office spaces. Many buildings are not set up for direct meters so landlords generally furnish electricity either by submeter or on a rent inclusion basis.

Rent inclusion means that the cost for supplying electricity is included in the rent based on a dollar amount per square foot.

This amount is subject to change as electricity rates change or based on the tenant’s increased use (e.g., use of additional equipment, overtime use etc.). Such changes are measured by electric survey in an attempt to determine the tenant’s consumption and demand.

But make no mistake, electricity rent inclusion provisions are often excessive profit centers for landlords.

So, to avoid being left off of the leasing medal podium, make sure to include the following in your electricity rent inclusion provisions:

  • Limit increases to actual increases in cost to the landlord. Most leases provide on day one that the value of the electric service may not be reflected in the rent and allow for a change in the rent inclusion amount based on survey. But this value is already included based on the negotiated market rent (and rent inclusion amount). The landlord should be entitled only to actual increases due to increases in the electric rate paid by the landlord to the utility and increases in your demand and consumption, and should not be entitled to change the negotiated business terms.​
  • Create a reasonable “baseline charge” in order to determine when an actual increase occurs.

Many leases create arbitrary baseline figures, such as use only during prescribed hours, or based on use of specific equipment. Any usage increases above that arbitrary baseline will result in increased costs to you.

The baseline should at least be the amount of electricity consumption of a typical similar tenant in that building. The landlord should be entitled to additional payments only if your use turns out to be greater than what is customary.

Some leases will set the baseline as the initial rent inclusion charge per square foot under the lease. This can be an acceptable compromise: i.e., if the actual cost to the landlord is greater (or less) than that anticipated by the parties when negotiating the business deal, an equitable adjustment can be made. This compromise would not work if you “got a deal” on the electric in exchange for some other concession.

  • Do not allow percentage increases in the electric rate paid by the landlord to result in similar increases in the rent inclusion factor. Usually some profit is already built into the initial rent inclusion factor figure and increases to the per square foot charge that you pay based on percentage increases in the electric rate that the landlord pays the utility will not correlate to actual increases in consumption (and start to look like a porter’s wage escalation, one of the more notorious landlord profit centers).
  • Allow for decreases (not just increases) in the rate. Landlord will strongly resist any decreases below the initial rent inclusion charge, but fluctuations above that initial rate should be allowed both up and down. Otherwise, a temporary blip in energy costs can have long term consequences even if costs dramatically decrease later.
  • Make sure that the landlord’s electric survey is conducted by an independent, reputable and experienced electrical engineer. You should also be provided with a written copy of the landlord’s engineer’s survey.
  • Have the ability to challenge the landlord’s consultant by having your own consultant conduct an electric survey. You should have a reasonable period of time to obtain your own electric survey from an independent, reputable and experienced electrical engineer.
  • Make sure that the electric surveys measure your actual use. The electrical engineer conducting each survey should be instructed to measure the electricity that you are actually consuming, not what equipment is plugged in or operable at any particular time if not actually consuming electricity.
  • Resolve any disputes between the two surveys by expedited arbitration. A good way to avoid anyone playing games with the surveys is to have the loser pay the other party’s fees for the arbitration.
  • Consult with an electrical engineer during the lease negotiations. We always counsel our clients to obtain independent experts to advise and work with us with respect to the drafting of the electrical aspects of the lease. This helps to make sure that you are getting the electrical capacity you bargained for at the price you expected.

Go for the gold when negotiating your electricity rent inclusion provision by including these nine suggestions. If you need me, I will be down at the pool working out with my horse.​