How to Understand and Improve Commercial Leases

The Challenge

After taking over as the new managing agent for a co-op building in Manhattan, we were advised of a situation where one of the commercial tenants was using a significant amount of electricity and not reimbursing the building.

The Solution

We reviewed the lease agreements, consulted with the building’s attorney, and then established a strategy. The lease required the tenant to pay for electric consumption, but the language in the lease and the mechanism for that didn’t really work and were not practical. We needed to have the co-op, which was the landlord for the space, hire an electrical consultant to start measuring the tenant’s future consumption and provide invoices so that the tenant could be billed. We also had to recover amounts due to the building for past electric service. We advised the board to engage an electrical consultant to estimate the tenant’s electric consumption. The tenant also agreed to have a consultant prepare a similar electrical consumption report. We used those reports to create a “historical average” to estimate an amount owed. We then negotiated a settlement based on those findings.

The Lesson

Commercial leases include many different terms, conditions, and obligations that extend well beyond the fixed-rent schedule. It’s important to know what the leases say and the obligations of each party, and to make sure the physical components are set up based on those terms. Failure to do so can cost the building significantly.