Definition§
An Expense Stop (or Stop Clause) is a provision found in commercial lease agreements that sets a predefined cap on the amount of operating expenses that a landlord is obligated to pay. Any amounts beyond this “stop” are typically the tenant’s responsibility. This arrangement allows landlords to predict their cost obligations and control their financial risk associated with rising operating expenses, while tenants get to enjoy the stability and predictability of a capped contribution from the landlord.
Examples§
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Office Building Lease: Suppose a company leases office space in a commercial building. The total operating expense for the building includes costs such as maintenance, security, insurance, and utilities. Their lease includes an expense stop of $10 per square foot. If the actual operating expense rises to $12 per square foot in a given year, the tenant will be responsible for paying the additional $2 per square foot.
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Retail Space: A retailer occupies a store in a shopping mall. The operating expenses of the mall are initially covered entirely by the landlord, up to an expense stop of $15 per square foot. In a particular year, due to rising security and cleaning costs, the operating expenses increase to $18 per square foot. In this scenario, the tenant must pay the $3 per square foot that exceeds the expense stop.
Frequently Asked Questions§
What types of expenses are included in an expense stop?§
Expenses typically included in an expense stop encompass building maintenance, utilities, property insurance, property taxes, security, and sometimes general administrative fees associated with property management.
Who benefits from an expense stop clause?§
Both landlords and tenants can benefit. Landlords gain financial protection and predictability, while tenants can benefit from knowing the maximum amount of operating expenses they might be required to pay.
Is an expense stop clause common in commercial leases?§
Yes, expense stop clauses are quite common in commercial real estate leases, particularly in multi-tenant buildings where operating expenses can vary significantly.
How is the expense stop amount determined?§
The expense stop amount is usually determined during lease negotiation and can be based on historical operating costs or a mutually agreed upon estimate of future expenses.
Can the expense stop amount be adjusted?§
While not typical, some lease agreements may include provisions for adjusting the expense stop based on predefined criteria, such as increased operating costs due to inflation or significant capital improvements.
Related Terms§
- Gross Lease: A type of lease where the tenant pays a fixed rental amount, and the landlord covers all operating expenses of the property.
- Net Lease: A lease in which the tenant is responsible for a portion or all of the property’s operating expenses in addition to the base rent.
- Escalation Clause: A clause in a lease agreement that allows the landlord to increase the tenant’s rent if operating costs or property taxes increase.
- CAM Charges: Common Area Maintenance charges are fees paid by tenants to cover the costs associated with maintaining shared spaces in a commercial property.
Online Resources§
References§
- “The Lease Manual: A Practical Guide” by Rodney J. Dillman
- “Commercial Leasing: A Transactional Primer” by Daniel B. Bogart
Suggested Books for Further Studies§
- “The Handbook of Commercial Real Estate Leasing: A Practical Guide for the Corporate Tenant” by Lawrence T. Ettore
- “Leasing NYC: A Guide for tenants and their agents” by Daniel A. Gershburg
- “Commercial Real Estate Leases: Analysis, Negotiations, and Forms” by Mark Strand
