More than 80% of businesses lease real estate somewhere to house their operations. Although a company’s space and facility costs are typically its highest annual operating expense after payroll, most companies never consider reviewing their lease for the purposes of reducing costs until a few months before their next lease expiry date. Those firms that do not open up their leases on a regular basis could be missing the opportunity to save thousands of dollars. Here are three items tenants should check:
There are a number of features which can make a building ‘green’. These include:
- Lease Operating Cost Verifications
Tenants should ensure they are only paying for the costs they agreed to pay during the original lease negotiation. Sometimes a company might successfully negotiate to change the clause describing which building repairs are considered operating expenses (ie., those costs which can be passed on to the tenants) and which ones are major capital expenses that the landlord must absorb himself. With so many different leases to content with, a landlord might make errors when calculating each tenant’s proportionate share of operating expenses. An example of this is a Montreal company who was overcharged by a cumulative total of $250,000. That excess amount was mistakenly paid by Year 4 of a 10 year lease. A tenant cannot even rely on an official audited reconciliation statement from the landlord to protect them from this problem. The auditing firm will inspect the landlord’s books only to ensure that it conforms to general International Financial Reporting Standards (IFRS). The auditor does not compare each individual lease in the building to the expenses charged to it. Tenants must do that themselves. - Space Measurement of Premises
A company should ensure that its office space has been officially measured. Almost all leases indicate the amount of square feet on which the tenant must pay rent. Most leases also contain details about the measurement standard in an appendix at the back of the lease. Some standards measure to the inside surfaces of walls while others measure to the outside surface. Some standards include the tenant’s percentage of common area (corridors and washrooms for example) not just on the tenant’s floor but on the ground floor too. This means increased costs to the tenant since the ground floor often has a large lobby. Not too long ago, an office tenant in Ottawa recovered more than $100,000 from his landlord after he discovered that he had been paying on more space than he actually occupied based on his lease’s measurement standard. - Cancellation Clause (and other Goodies)
A firm should review its lease for a possible cancellation clause, allowing the tenant the right to cancel its lease at some point during the term. Often as employees leave and are replaced, a number of clauses, written for the benefit of the tenant, are forgotten in the back of the file room or computer server. A couple years ago, a tenant in 60,000 square feet of prime office space in Halifax determined that after five years into a ten year lease, he would like to reduce his space (and costs) by one-third. However, with five and a half years remaining on his lease term (which was signed when rates were higher) and a slow economy in Halifax currently, he figured he did not stand much of a chance of succeeding. After serveral months of unsuccessful discussions with his landlord, as well as unsuccessful attempts a subleasing his excess space, he was about to give up. One of his staff then realized that half a decade earlier during the lease negotiation, a small clause had been included in the middle of the lease. This clause allowed him to cancel the lease without penalty after the 6th year. Suffice to say, his negotiating leverage with respect to his landlord quickly increased a hundred fold. He not only successfully reduced his space but he also reduced his rental rate on his remaining space.