Definition
A stop clause in a lease agreement is a provision that sets a threshold for operating expenses. Once the operating expenses surpass this pre-determined amount, the tenant is responsible for covering the excess costs. The base amount is typically fixed at the operating expense level of the first full year of the lease.
Examples
- Utility Expenses: The lease agreement includes a stop clause that requires the tenant to pay for utility expenses above $2,500 per year. If the annual utility costs are $3,000, the tenant would pay $500 while the landlord pays $2,500.
- Maintenance Fees: A commercial tenant agrees to bear maintenance costs exceeding $5,000 annually. If the maintenance costs total $6,000 for the year, the tenant would be responsible for covering the additional $1,000 above the stop clause limit.
Frequently Asked Questions (FAQs)
What is the purpose of a stop clause?
A stop clause is designed to protect landlords from increasing operating expenses, ensuring that tenants share a part of the financial burden.
How is the base amount determined?
The base amount for a stop clause is generally determined by the actual operating expenses during the first full year of the lease term.
Can a stop clause be negotiable?
Yes, the specifics of a stop clause, including the base amount and types of expenses covered, are often negotiable between the tenant and the landlord.
Are stop clauses common in both commercial and residential leases?
Stop clauses are more common in commercial lease agreements than in residential leases.
What types of operating expenses are typically included in a stop clause?
Operating expenses can include utilities, maintenance, property taxes, insurance, and any other costs associated with the property’s operation.
Related Terms with Definitions
Base (Expense) Year
The initial year of a lease term that sets the baseline for operating expenses, against which future expenses are compared.
Operating Expenses
Costs associated with the operation and maintenance of a property, including utilities, repairs, insurance, and property taxes.
Net Lease
A type of lease where the tenant pays a portion or all of the property expenses in addition to rent.
Gross Lease
A lease where the landlord pays all expenses associated with the property, and the tenant pays a fixed rent.
Triple Net Lease (NNN)
A lease agreement where the tenant is responsible for property taxes, insurance, and maintenance costs in addition to rent.
Online Resources
- Nolo - Leases: A comprehensive guide on lease agreements, including clauses and terms.
- US Small Business Administration: Offers valuable resources and advice for small businesses, including details on commercial lease agreements.
- PropertyMetrics: Detailed articles on commercial real estate terms and financial metrics.
References
- “Fundamentals of Real Estate” by Charles F. Floyd and Marcus T. Allen.
- “Real Estate Principles” by Charles J. Jacobus.
- “Commercial Leasing: A Transactional Primer” by Daniel B. Bogart and Ceilyn Boyd.
Suggested Books for Further Studies
- “Commercial Real Estate Investment” by David Geltner and Norman G. Miller: Offers detailed insights into investment strategies and lease structures.
- “The Real Estate Wholesaling Bible” by Than Merrill: Provides comprehensive knowledge about various real estate concepts, including leasing.
- “Property Management Kit For Dummies” by Robert Griswold: Includes a thorough explanation of lease agreements and related clauses.
