Lessons From the Winter of Discontent
11/2/2016 | Articles & Alerts
As I stare at the driveway, once again covered in snow, that I shoveled not 2 hours ago, I cannot help but try to find some silver lining at the edge of this Winter of Discontent. While gazing through the window, a warm feeling envelops me as I realize that I am learning valuable lessons from this global-warming-defying winter. What have I learned?
The most obvious lesson (to me) is that snow and ice removal is the epitome of an “uncontrollable cost”. It has become unusual for any tenant not to insist on a limitation on operating expense costs, affectionately known as “CAM caps”. In a competitive environment, landlords have grown accustomed to granting this request and are routinely giving CAM caps. However, it is critical for a landlord to exclude from any cap costs that it cannot control. This year, a landlord with a cap on CAM that does not exclude snow and ice removal costs will find its pro forma in a sad state.
Even with a carve-out for snow and ice removal, most landlords bill CAM in fixed monthly installments, based on prior years’ estimates, with a year-end reconciliation. Last year was a light snow year, so the estimates are likely fairly low. In that case, landlords are experiencing a cash flow crunch by having to fund enormous snow removal costs. To remedy this real-life issue, landlords should consider including in their leases the right to bill snow removal costs on an interim, or as-incurred basis. That way, the landlord does not have to wait until the end of the calendar year to true-up expenses and recover excessive snow costs.
Many office leases bill operating expenses over a base-year. That base year is used throughout the term of the lease as the comparison year. If the base year expenses are unusually high, the landlord is harmed because the difference between actual costs and base year costs are artificially low. If the 2014 is the base year, then the snow costs alone will balloon the base year costs well above normal levels. Landlords should negotiate the right to adjust the base year expenses to back out any extraordinary expenses, such as a heavy snow year. Another option is to have a separate base stop number just for snow.
Finally, for the first time since Superstorm Sandy, our region has experienced wide-spread power outages. Landlords must be cognizant of what their utility and casualty clauses say. A landlord does not want to find itself with an abatement of rent because of an extended power failure. Similarly, landlords should focus on whether a tenant carries business interruption insurance, as that is a viable way to mitigate a tenant’s rent exposure when the leased space cannot be used.
These are all valuable lessons to learn, although I’m sure most of us would prefer to sit in the sun.