Operating Costs – they are discussed endlessly during the
lease negotiations and then often become the most contentious
ongoing issue between landlord and tenant.
The almost universal practice is that at the beginning of each
year landlord estimates operating costs and tenant pays in
instalments based on that estimate. Shortly after the end of
the year the landlord delivers a statement of operating costs for
the past year which may be certified or audited depending on the
provisions of the lease. Tenant is given a period of time to
challenge the statement after which it is deemed to be final and
forms the basis of an adjustment between landlord and tenant
reflecting the difference between estimated and actual operating
The form and content of the statement is crucial to tenant's
ability to mount an effective challenge to the operating costs.
The Ontario Superior Court of Justice recently considered this
issue in 1877352 Ontario Inc. v. 699147 Ontario Inc.
(2016) 65 R.P.R. (5th) 327. The facts are
"bad" and do not merit a summary except to say the lease
provision was conventional if a bit abbreviated. One of the
questions before the Court was:
"Is the Landlord Obliged to Deliver Documents that Support
the Claim for Additional Rent?"
Of importance to landlords and tenants is the Court's
"Both parties agree that the tenancy relationship is
governed by an obligation to deal in good faith. The duty of the
Landlord to honestly and reasonably perform its obligations under
this Lease is served by requiring it to deliver all documents that
are the basis for the annual adjustment. ... In my view, it
is commercially reasonable to imply a term into the Lease that
requires the Landlord to deliver with its annual adjustment for
Additional Rent a copy of all of the documents, such as tax bills,
insurance premiums, property management invoices, which support and
explain the amounts claimed from the Tenant in the
Such a statement goes far beyond what most landlords currently
deliver and, absent an express audit right in the lease, what
tenants generally have access to.
It may even be that until the detailed statement (and supporting
material) required by this Court is delivered, any period of time a
tenant has to dispute that statement will not run.
Russell v. Township of Georgian Bay provides a useful reminder of the fact that while municipal officials sometimes appear to hold all of the cards in disputes with home owners, that is not always the case.
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