When real estate taxes, insurance, and operating expenses (sometimes referred to as Common Area Maintenance, or CAM, charges) are passed on to tenants, the amount passed on is based on the increase in these expenses as compared to the Base Year (the initial rent already takes into account these charges). 

Organization of building owners and managers, engaged in lobbying and producing publications, including the BOMA standards.

A Triple Net Lease passes on to tenants a portion of the (1) Real estate taxes; (2) Insurance; and, (3) Operating Expenses (sometimes referred to as Common Area Maintenance, or CAM, charges, but often include maintenance outside of just “common areas.”  Other variations are Double Net (typically no operating expenses are passed through), and a Gross Lease.

Pass-throughs may be assessed at different times (per the lease), and often commercial leases will allow a landlord to retroactively apply assessed charges.  Sometimes a landlord will not assess any charges for years, but then choose to.  Negotiating the exact provisions is critical to predicting expenses and running a successful operation.  The extent of rights to audit is also a negotiable and important issue.

An Estoppel Certificate is a document typically used in performing due diligence prior to the purchase of tenant-occupied property.  The purpose is for a lender and purchaser to have written confirmation from tenants of certain terms.  Important amongst these are: the rental amount; security deposit; duration of lease; and, as discussed further below, a “subordination” clause.

The subordination clause is used to confirm that the tenants have agreed, in their lease, that their interest is subordinate to future mortgages.  Without such confirmation, the tenants’ leases have priority over mortgages that are subsequently obtained.  Furthermore, only a tenant whose interest is subordinate to the mortgage can be evicted.  A purchaser (and their lender) may be stuck with tenants for an indefinite period without the ability to earn market rental values.  A tenant may be locked in for years, and potentially even forever—courts have upheld provisions giving the tenant the right to perpetual renewal of leases.

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Refers to the buildout a landlord will deliver.  a Grey Box includes the bare minimum: e.g. just walls,  no HVAC, no wiring.  A Vanilla Box may have: electrical wiring, flooring, dropped ceiling, HVAC and air ducts.  What the Landlord has agreed to buildout is critical.  Detailed plans and specifications are ideal.

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A LIQUIDATED DAMAGES CLAUSE in a contract specifies an amount of damages that party is entitled to for a particular breach of that agreement. The purpose is to streamline, or even deter litigation altogether by setting a fixed amount for the breach. They are very useful in eliminating unpredictability, and ultimately costs. However, there are several rules that must be followed, or the clause will be invalidated by a Court.

First, the liquidated damages cannot be a penalty—the amount specified must be reasonable under the circumstances, and cannot be “designed to substantially exceed the damages suffered, and…to serve as a threat to compel compliance through the imposition of charges bearing little or no relationship to the amount of actual loss.” Utility Consumers’ Action Network, Inc. v. AT&T Broadband, 135 Cal. App. 4th 1023, 1029 (2006); Cal. Civ. Code § 1671(b). A guiding principle is that any number picked cannot be arbitrary, and instead must be based on a reasonable attempt at determining a fair amount of compensation for the breach.

There are further rules if the clause is contained in a contract for the purchase or rental of personal property; a service used primarily for personal, family, or household purposes; or a residential lease. In those cases, a liquidated damages clause is allowed only when “it would be impracticable or extremely difficult to fix the actual damage.” Cal. Civ. Code § 1671(c) and (d).

Every situation is different, and should be evaluated by a qualified attorney. After all, if the clause unenforceable, it won’t save time, and may even ultimately cost more. It is always better to prevent problems before they occur, rather than waiting, and a well-crafted liquidated damages clause can be very effective in doing so.