In the consideration of leases, lawyers are often asked to
review the provisions relating to recoveries by a landlord for
operating costs and property taxes. Leases that state that they are
"net" leases often are not when a review of the
provisions dealing with a landlord's recoveries is undertaken.
These provisions often contain exceptions which prohibit recoveries
of certain items, and in certain instances. There are often
exceptions for specific tenants, negotiated as a business item in
the offer to lease, for government tenants, anchor tenants and big
Each landlord should sit down and undertake a careful analysis
of the recovery provisions in its leases. In undertaking such an
analysis the landlord's accountant or accounting staff needs to
be engaged. Test calculations need to be run to determine what is
and what is not recoverable.
It is also necessary to ensure that when entering into an offer
to lease that the provisions relating to additional rent mirror or
do not conflict with the terms of the standard form of lease.
If it is the landlord's intention to provide exceptions or
ceilings for government, large box and anchor tenants, does the
landlord intend to pass on to other tenants the projected
shortfall? If so, the provisions providing for recovery need to be
drafted to give the landlord the right to charge any shortfall to
other tenants. Prior to doing this a business consideration needs
to be made, and that is the consideration of the impact on the
costs being charged to the other tenants and the impact on the
landlord's competiveness in the marketplace, which will impact
on the landlord's ability to lease, or cause the landlord to
absorb all or part of such amounts thus reducing its rate of
When a landlord is considering changes in the recovery
provisions in its standard form of lease, or upon the acquisition
of a new property and considering imposing its standard lease
rather than use the lease utilized by the previous owner, a
landlord must undertake a careful review of the lease utilized by
the previous landlord and what it is proposing as a replacement.
The review needs to determine how they will complement each other,
and to ensure that there not an uneven recovery of costs. It also
has the potential of creating an accounting nightmare in that
recoveries will then differ from tenant to tenant, with the result
that the landlord cannot impose a blanket recovery program, but
must review each tenant's lease separately and make an
allocation separate to each tenant. An aggregate calculation of
such will determine whether the landlord has made a full recovery
or is subsidizing the recoveries. It is to be noted what is not
recovered by the landlord from the tenants will be borne by the
landlord. A landlord does not want to be in a situation where after
a number of years the actual costs greatly exceed what the landlord
is able to recover from a tenant, and the shortfall is borne by the
landlord out of the basic rent, such that the landlord is in a real
The foregoing is not meant to be complete and comprehensive, but
is meant to cause landlords to undertake the appropriate review of
its leases and its procedures to ensure that it maximizes its
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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