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Hello,
As a long hot summer draws to a close, our thoughts drift from gold medals to electricity to run our air conditioning, and we manage to link Olympic events and lease electricity escalations in one newsletter (do not try this at home).
Follow our nine essential provisions so that you can prevent being gouged by an electricity rent inclusion clause that becomes an excessive profit center for your landlord.
Sincerely,
Alan Katz Mintz & Gold LLP |
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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. |
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Featured Transaction
Mintz & Gold recently represented Zondervan Corporation, a division of HarperCollins Publishers LLC in connection with the extension of its lease and conversion from a net lease to a gross lease with respect to 90,849 rentable square feet of office space and 10,422 rentable square feet of warehouse space at 5300 Corporate Grove Drive, Grand Rapids, Michigan. For over eighty years, Zondervan has partnered with authors to deliver transformational, educational and vocational resources that renew minds, enrich lives, and change the world. Zondervan products are sold to domestic and international ministries and retail facilities, including independent Christian and general bookstores and chains, general merchandisers, direct sellers, and online retailers. Zondervan products are available in nearly 200 languages in 60 countries. |
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About Us
Mintz & Gold prides itself on providing the highest quality legal representation often associated with large law firms with the attention and reasonable costs of a smaller law firm. Mintz & Gold's Real Estate Department has a national practice specializing in a broad range of commercial real estate law, with a particular focus on commercial leasing. We have extensive experience with respect to office, retail and shopping center leasing, and have represented major Manhattan landlords, national and multinational institutional tenants and national retail chains. Most of our attorneys practiced for many years at large institutional law firms before joining Mintz & Gold. For more information regarding Mintz & Gold's real estate practice, click here. For a list of representative transactions of Mintz & Gold's real estate group, click here. For Mintz & Gold's website, click here. Contact: Alan Katz katz@mintzandgold.comTelephone: (212) 696-4848 Fax: (212) 696-1231 You are receiving this newsletter because you signed up to receive it or are a client, a friend or have worked with us on a prior transaction.
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Disclaimer
This newsletter has been prepared for general information purposes only, and is provided with the understanding and subject to the user's agreement that it does not constitute the rendering of legal advice or other professional advice by Mintz & Gold LLP, and does not create any attorney-client or other special relationship. The content of this newsletter may be considered advertising under the ethical rules of certain jurisdictions and prior results do not guarantee a similar outcome. You should not rely upon this newsletter without seeking legal advice from an attorney licensed in the relevant jurisdiction(s). THE CONTENT OF THIS NEWSLETTER IS PROVIDED AS-IS WITH NO REPRESENTATIONS OR WARRANTIES, EITHER EXPRESS OR IMPLIED, INCLUDING, BUT NOT LIMITED TO, IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE AND NONINFRINGEMENT. Additionally, the information contained in this newsletter does not constitute tax advice. Any discussion of tax matters contained in this newsletter is not intended or written to be used, and cannot be used, for the purpose of avoiding penalties under the Internal Revenue Code or promoting, marketing or recommending to another party any transaction or matter. Copyright © 2012 Alan Katz. All rights reserved.
You may reproduce this article by including this copyright and, if reproducing it electronically, including a link to www.mintzandgold.com. No attorneys were harmed in the production of this newsletter.
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