Canada: Estimating Operating Costs: A Risky Business

We often see in leases or offers to lease a landlord's estimates for operating costs or real estate taxes. Landlords will base these estimates on prior years, but this can be more difficult when dealing with a new development project.

A recent Quebec Superior Court decision1 provides an interesting analysis of how to reconcile estimates provided for in a lease with the detailed provisions of the lease setting forth how the actual costs will be calculated.

Estimated vs. actual amounts

In this case, both the letter of intent and lease estimated the tenant's proportionate share of real estate taxes at $3.00 per square foot of gross leasable area of the leased premises for the first year of the term. The lease also set forth how the tenant's proportionate share of real estate taxes would be calculated, and was quite detailed in this regard.

As it turned out, the actual amount payable by the tenant for its proportionate share of real estate taxes was $8.09 per square foot for 2010, $11.86 for 2011, $12.34 for 2012 and $11.43 for 2013. The tenant vigorously contested the amounts charged by the landlord for real estate taxes.

The tenant based its arguments on the fact that (i) the parties agreed the tenant would pay $3.00 per square foot for real estate taxes for the first year of the term, (ii) the manner in which the calculation of the tenant's proportionate share of real estate taxes was set forth in the lease was unclear and ambiguous and (iii) the total discretion given to the landlord in determining the parts of the shopping centre to be included for calculating the tenant's proportionate share was against public order as it was indeterminable.

Lease: tenant's obligations clear

While the discrepancy between the estimated $3.00 per square foot and the actual $8.09 per square foot for the first year of the term was substantial, the judge believed that the parties' intent was $3.00 per square foot was not a settled amount but simply an estimate.

The judge looked into the exchange of drafts of the letter of intent and the lease to better understand the parties' intent in this regard. Based on the negotiations, the judge concluded it was not the intent of the parties that the $3.00 per square foot for real estate taxes was a fixed amount but rather just an estimate.

The judge then looked into the tenant's argument that the areas of the shopping centre used to determine the real estate taxes did not correspond to what was intended, and the great discrepancy between the estimated and actual amounts clearly demonstrated that the landlord's method for calculating real estate taxes was not what the parties intended.

The judge disagreed with the tenant's view and concluded the lease was clear in terms of which areas of the shopping centre were to be included for calculating real estate taxes, adding the tenant simply did not properly focus on schedules of the lease that showed the areas to be included in such calculation.

In regard to the landlord's discretion in determining which parts of the shopping centre to include in calculating the amount payable by the tenant for real estate taxes, the judge concluded such discretion is not contrary to Article 1373, second paragraph, of the Civil Code of Quebec and that the tenant's obligation was determinable. The judge again pointed to the schedule of the lease, which sets out the parts of the shopping centre to be included in calculating real estate taxes. A careful review of the schedule of the lease would have enabled the tenant to better determine which areas were to be used for calculating real estate taxes.

Determine how estimate is calculated

The amounts in this case were substantial as the tenant was required to pay $488,994.88, plus interest.

What should be retained from this case is a tenant should not blindly accept a landlord's estimates of operating costs or real estate taxes and should request the detailed calculation of how such estimates are determined in order to fully understand the basis of such calculations.

A tenant should not assume estimates are binding on the landlord in any way and, while there may be an expectation that the actual costs will be "in the ballpark," to the extent the final determination of how such amounts will be calculated is clearly set out in the lease, the tenant will be unable to rely on such estimates as binding upon the landlord. Instead of referring to an estimate, should a tenant truly want to limit its obligation to pay above a certain amount for operating costs or real estate taxes, it should clearly state so.


1. Iberville Developments Leasing Ltd. v. Golf Town Operating, L.P. 2014 QCCS 1428.

Norton Rose Fulbright Canada LLP

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