Commercial Triple Net Leases: Allocating Maintenance Costs

Maintenance will be necessary, and your lease will spell out who pays for it.

By , Attorney
Updated by Amanda Hayes, Attorney (University of North Carolina School of Law)

In a triple net lease, the tenant is responsible for their rent and a portion of the building's operating costs, including property taxes, insurance, and maintenance. In a single net lease, the tenant pays for their rent and a portion of the property taxes. In a double net, the tenant pays rent and a portion of the property taxes and insurance.

You'll want to negotiate each of the three areas of costs under your triple net lease. For maintenance expenses, you'll define your share of the costs under your lease's maintenance clause.

You'll confront three major issues when negotiating the maintenance clause of your commercial lease:

  1. What portion of the upkeep costs will be paid by the landlord?
  2. What portion of the upkeep costs will be paid by the tenants?
  3. How should the tenants share their portion among themselves?

Maintenance Expenses in a Commercial Triple Net Lease

Maintenance costs include the cost to maintain the building's upkeep, including common areas such as lobbies, hallways, garages, and elevators. You might also be asked to contribute a proportionate share of the building-wide air and heating costs.

If you lease space in an office building, there could be an added management fee. This fee will cover the cost of the building's superintendent or the monthly amount the landlord pays a management company to run the building. All of these costs are part of the landlord's ongoing maintenance expenses, and many are passed through to the tenant.

The landlord could consider any of the following to be maintenance expenses:

  • accounting fees
  • travel expenses for the landlord and employees
  • legal fees
  • office rental for the landlord's office
  • security services
  • major improvements to the building (capital expenditures)
  • real estate commissions
  • janitorial expenses
  • association membership fees
  • management fees
  • parking lot repaving
  • light bulb replacement
  • salaries for landlord's employees
  • advertising expenses
  • inspection fees
  • maintenance supplies
  • landscaping
  • broker fees, and
  • deductible amounts for insurance claims.

Landlords and tenants debate endlessly over what, exactly, should be included in the maintenance expenses under the triple net lease.

Your negotiations over maintenance costs will pit the "pass-throughs" against the "exclusions."

Pass-throughs. The landlord will usually list the charges that are passed through to you—the tenant. But this list is often modified with the slippery words, "Tenant will be responsible for the following costs, without limitation …." The effect of "without limitation" is to make it possible for the landlord to tack on extra charges.

Exclusions. The tenant, for their part, will usually press for specific exclusions to maintenance costs, such as advertising expenses and legal fees. Alternatively, the tenant can negotiate for the landlord to make a specific list of maintenance items that the tenant is responsible for. Then any item not mentioned will be the landlord's sole responsibility.

Allocating Maintenance Expenses Between Landlord and Tenant

One sensible way to determine who—the landlord or tenant—should be responsible for a specific maintenance cost is to ask whether the expense is for:

  • a capital improvement (a replacement of a structural element of the building, or an improvement that adds lasting value) or
  • the day-to-day running of the property.

Unfortunately, there's no clear and widely accepted understanding of the difference between a capital expense and a noncapital expense.

A tenant might argue that the costs of maintaining the building and roof structure and bringing the building up to code are capital costs and should be entirely the landlord's responsibility. A landlord might argue that the costs of servicing the heating and air-conditioning and maintaining the building's electrical equipment are maintenance items that can reasonably be passed on to tenants.

Some landlords attempt to charge tenants for fairly outrageous items, including leasing commissions, other tenants' improvement allowances, and legal fees occasioned by other tenants' misdeeds.

You can follow these negotiation tips, below, to avoid burdensome expenses being passed from the landlord through to you.

Amortize Capital Improvements

Landlords have very creative ways to bulk up their list of maintenance expenses. For example, capital improvements that have the effect of lowering your operating costs could be shoved your way.

Many capital improvements will also benefit the landlord (and future tenants) long after you've moved out. And if your lease expires soon after you've paid the bill, the benefit you'll have received from these improvements will be small indeed. For example, if the landlord puts in building-wide sprinklers during the last year (or security features such as locks, better doors, or windows), you'll get socked with the pass-through but have very little time to benefit from them.

To guard against last-minute pass-throughs that you won't be around to enjoy, press for the right to amortize, or spread, the cost of the expense over the useful life of the item. The landlord is likely to counter with, "amortized over the useful life, or five years, or over the length of the remainder of the lease, whichever is shorter." The less you can pay over the course of your lease, the better.

Exclude Leased Items

Because payments on a leased item, such as a car, are clearly considered operating expenses, a smart landlord will lease an item—rather than purchase it—in order to pass through the cost of the payments. Ask the landlord whether their operating expenses include leased items. Then bargain for any leased items to be explicitly excluded from the pass-throughs.

Amortize Insurance Deductibles

Your landlord's deductible amount is a favorite inclusion in the list of pass-throughs. The deductible is the amount not covered in the event of a claim on the landlord's insurance policy. To keep premiums low, deductible amounts can be quite high. For earthquake and terrorism insurance, for example, the deductibles could be 5% to 10% of the replacement costs.

Protect yourself by bargaining for the amortization of these costs. For support, point to the fact that, under general accounting principles, you're entitled to amortize the cost (passed on to you) of repairs. Because paying for the deductible isn't much different than paying directly for repairs, it too should be amortized.

Allocating Maintenance Expenses Between Tenants

Operating costs, like taxes and insurance costs, are sometimes easy to allocate fairly. Roof upkeep, systems repair, and similar core maintenance projects benefit all tenants, and dividing the cost among them according to the space they rent makes sense. But the same isn't true for variable costs, such as electricity, gas, and water.

You'll need to determine the best solution to portion out your fair share and negotiate for your preferred expense distribution with the landlord. You should also prepare for complicated scenarios, such as when your solution conflicts with other tenants' leases or the building isn't fully leased out.

Fixed vs. Variable Maintenance Costs

Fixed costs don't vary with the level of occupancy, such as the landlord's insurance premiums or the cost of a nighttime security guard. Variable costs rise or fall with the level of occupancy, like the costs for cleaning, utilities, and some repairs.

If all tenants in the building equally use the variable services, it makes sense to charge them according to the portion of the building they lease. For example, in a retail building with four shops, each business probably uses the common areas, parking lots, heat, and electricity in roughly the same way. Sharing these costs according to the size of the tenant's space would be fair.

The situation is different, however, if there's a mix of tenants, some of whom use more of the common areas than others. In this situation, there are some potential solutions to divide the cost between tenants.

Submeter the Rental Space

The best solution is to have the space submetered. If each rented space has its own meter, then it's easy to charge each tenant for their individual usage.

But rental space in office buildings and some retail buildings usually won't be submetered. That's because the boundaries of each rental often change, depending on how much space the current tenant has leased.

For example, the third floor might belong to one tenant during one rental term, but then be leased out to two or three smaller tenants after the first one has moved out. The landlord will not want to reposition utility meters every time they reconfigure the space to suit tenants' needs.

Apply the Building Usage Standard

In the absence of submeters, landlords often establish a "building usage standard," which is their calculation of the cost of each utility per square foot. Tenants are then charged according to the amount of space they rent. But this method fails to address the main challenge: Tenants don't use utilities at the same rate.

For example, a computer business that's small in square footage but crammed with electricity-guzzling equipment will devour much more power than its neighbor whose cavernous quarters are used to display artwork. If utility costs are allocated according to square feet rented, the art gallery will end up paying more than its fair share.

Negotiating Your Fair Share of Maintenance Costs

When negotiating your own triple net lease, factor in possible disparities of use among the tenants in your building. If everyone is in the same line of work (a building full of dentists, for example), it's more likely that the usage will be uniform than if there's a wide mix of tenants. If you do suspect that another tenant's utility use will be disproportionately high (or that yours will be disproportionately low), press for an adjustment in the allocation of utility charges to reflect reality.

Unfortunately, if there are tenants in place already, you're likely to hear the same objection you'll encounter when pressing for equitable insurance allocations: Even a sympathetic landlord can't shift operating costs to utility-devouring tenants if their leases already specify that costs will be shared based on their portion of the rentable space. And the landlord won't be eager to absorb the difference themselves.

You might have to make a note of this inequity and use it to press for another concession from the landlord, such as reduced rent or an extra parking space.

"Grossing Up" Provisions in a Partially Leased Building

Unless you rent an entire building, you're likely to encounter the odd term "grossing up" during your discussions of operating expense allocations. The term describes how landlords allocate a tenant's share of operating expenses when the building isn't fully leased.

Done right, the method ensures that tenants pay their fair share of operating—including maintenance—expenses. But on first blush, it seems unfair. Trust us, it's not.

For example, suppose you rent one floor in a ten-story building, where all floors are the same size. You have 10% of the rentable space, and the other nine floors are empty. Now suppose you use $100,000 worth of electricity during the first year, while the rest of the building remained empty. If you were to pay for the cost of electricity based on your percent of the rentable space, you'd pay only $10,000, and the landlord would be left to pay the rest (which neither they nor anyone else but you used).

To fix this inequity, when calculating your share, landlords will assume that the building is fully rented ("grossed up"), and that everyone uses the same amount of electricity that you do. In that event, the electricity bill would be $1,000,000 (ten floors of ten tenants each using $100,000 worth of electricity per year), and your 10% would mean that you'd pay $100,000—exactly the amount you in fact used.

Grossing up is appropriate only for variable expenses; fixed costs shouldn't be grossed up. For instance, if your lease obligates you to pay 10% of the landlord's property taxes, that's all you should pay, regardless of whether the property is fully leased.

Consulting a Lawyer

Negotiating a triple net lease that's fair and manageable is crucial. The terms of the lease that you bargain for now will likely remain in place for the life of your lease and you'll be expected to abide by them—good or bad.

If you have any questions about your lease, particularly what maintenance costs you're responsible for, you should reach out to a real estate lawyer with commercial lease experience. They can help you negotiate a fair allocation of maintenance expenses and prepare you for expected costs under your triple net lease.

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