More than 80 per cent 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 purpose of reducing costs until a few months before the next termination date. According to Bruce Wolfgram, director of leasing and sales for J.J. Barnicke Ltd. Realtor, those firms that do not open up their lease on a regular basis could be missing the opportunity to save thousands of dollars. Wolfgram recently shared with the Ottawa Business Journal a few of the conditions tenants should re-evaluate.
Lease Operating Cost Verifications
Tenants should ensure they are only paying for the costs they agreed to during the original lease negotiation. Often a company might alter the clause describing which building repairs are considered operating expenses (these can be passed on to the tenants) and which are considered major capital expenses (costs the landlord must absorb). With so many different leases to contend with, a landlord might make errors when calculating the tenant’s proportion of operating expenses. Recently, a company discovered that in the case of a large regional office in Montreal, it was overcharged by a cumulative total to date of $250,000. That excess amount was paid by year four of 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 generally accepted accounting principles (GAAP). The auditor does not compare each individual lease in the building to the expenses charged to it.
Space measurement of Premises
A company should ensure that its office space has been officially measured. Almost all leases contain the amount of square feet (or square meters) on which the tenant must pay rent. Most leases contain details about the measurements standard in an appendix at the back of the lease. Some standards measure to the inside surface 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. That means increased costs to the tenant since the ground fl oor 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 he had been paying on 28,000 square feet 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 unilateral right to cancel the 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. 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 commitment (which was executed when rental rates were significantly higher) and a slow economy in Halifax at the current time, he figured he did not stand much of a chance of succeeding. After several months of unsuccessful discussions with his landlord, as well as unsuccessful attempts at 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 sixth year, provided he gave written notice to his landlord by the end of the fifth year. Suffice is to say, his negotiating leverage, vis-à-vis his landlord, quickly increased a hundred fold. He’s not only successfully reduced the size of his space by one-third he also reduced the rental rate on his remaining space.