“Additional Rent” and a Tenant’s “Proportionate Share”

Most commercial leases contain terms that require tenants to pay additional rent. Additional rent is usually a share of the costs and charges incurred to operate the property. These costs can include municipal taxes, insurance premiums, repair and maintenance costs and common area utility charges. In any given year, these charges change and fluctuate.  Landlords often provide an annual estimate which tenants pay subject to a year-end reconciliation. Lease terms governing these types of costs are often general in nature because it is not possible to contemplate all the variables and, at the same time, have the same additional rent provision apply to all the tenants in a commercial building.

As a general rule, tenants are obliged to pay their “proportionate share” of these types of costs.  How do landlords calculate the “proportionate share”? Ordinarily, this is calculated based on the relative square footage occupied by each tenant. That makes sense for fixed costs such as taxes, insurance and common area utility costs.  But what happens when one tenant obtains a greater benefit from these additional costs than others? Are the other tenants obliged to subsidize that tenant or is there a more equitable manner in which to allocate such costs? What authority does a landlord have to apply different methods of calculation for different types of common expenses?

A recent commercial leasing case provides an illustration of a landlord’s ability to change the method of calculating additional rent and an example of doing so based on the benefit received by the particular tenant as opposed to square footage.

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