In a net lease, the tenant pays a proportionate share of the building’s operating costs. Once a year the landlord reconciles the estimate against what was actually spent, and a bill or a credit follows. That reconciliation is the single most disputed document in commercial tenancy, and most tenants never read it properly.
Start with the proportionate share
Before looking at any dollar figure, check the fraction. Your share is normally your rentable area divided by the building’s total rentable area. Two things to verify: that your area matches the lease, and that the denominator is the whole building rather than a smaller pool that has quietly shrunk.
If the building has been re-measured, or space has been reclassified from common area to rentable, your share can move without anyone telling you.
The gross-up line
In a partly vacant building, many leases allow the landlord to gross up variable costs to what they would have been at ninety-five or one hundred per cent occupancy. The logic is sound — a tenant should not get a windfall because the neighbouring suite is empty, and equally should not be charged for it.
What to check: that the gross-up is applied only to costs that actually vary with occupancy, and not to fixed costs like property tax and insurance. Grossing up a fixed cost inflates the bill with no justification.
Capital items
This is where the money is. A new roof, a boiler replacement, a parking lot resurfacing — these are capital expenditures with useful lives measured in decades. Many leases permit recovery, and that is normal. What is not normal is recovering the full cost in the year it was spent.
The reasonable treatment is amortisation over the item’s useful life, with interest at a stated rate, so each year’s tenants pay for the years they occupy. If a reconciliation shows a large single-year capital charge, ask for the amortisation schedule.
Management fees
Usually a percentage of gross or net rent. Check the rate against the lease, check the base it is applied to, and check that the landlord is not also charging an administration fee on top of the same costs the management fee is meant to cover.
Exclusions
A well-drafted lease lists what is not an operating cost. Common exclusions: leasing commissions, tenant inducements, the landlord’s own financing and income tax, costs of repairing structural defects, and costs recovered under warranty or insurance. Read the exclusions list, then read the statement looking for them.
Your audit right
Most leases give the tenant a window — often sixty to ninety days after the reconciliation — to inspect the landlord’s records. Miss the window and the statement is deemed accepted. Diarise it the day the statement arrives.
A request to see supporting invoices is not an accusation. It is the ordinary exercise of a contractual right, and a competent landlord will have the file ready.
What to negotiate next time
If a reconciliation surprises you, the fix belongs in the next lease or renewal: a cap on year-over-year increases in controllable costs, a clear exclusions list, mandatory amortisation of capital items, and a stated audit period. Those four clauses prevent almost every dispute that occurs.
Talk it through with Rimrock
Rimrock Sales & Leasing works with owners, investors and tenants across Calgary, Edmonton and Lethbridge. Get in touch or call 403-910-4611.