There are several provisions in a lease that can create some head scratching. We get calls from clients wondering what in the heck a Gross Up clause in a lease is. It can be confusing, so let's dive into what it is and how negotiations can ensue.
First, a gross up provision is a clause in a commercial lease that allows landlords to adjust operating expenses to account for occupancy levels that are lower than anticipated or the total area of the building or space. Or to put another way, even if spaces within a building are vacant, there are still expenses that need to be paid. If an office suite is vacant, does that mean you need less on-site security? Probably the opposite in some cases. Ultimately, the purpose of a gross up provision is to ensure that the landlord is able to recover a certain level of expenses that they anticipated, regardless of the actual occupancy rate or area used by the tenant.
For example, let's say a lease agreement states that a tenant is responsible for paying their pro-rata share of operating expenses, but the building is only 80% occupied during a given year. The landlord may not be able to recover the full amount of expenses from the tenants. However, with a gross up provision, the landlord would be able to "gross up" the operating expenses to account for the vacancy and charge the remaining tenants a proportionally higher share of expenses to cover the shortfall.
Gross up provisions can be calculated in different ways, but typically involve adjusting the operating expenses for a specified occupancy level, which is often 95% or 100%, depending on the lease agreement. This means that expenses are calculated always as if the property is 95 or 100% occupied, even if it isn't. Some landlords may be open to negotiation on this subject while others, especially institutional investors, may not. As a tenant, it's always worth bringing up though and understanding the implications.
Gross up provisions can be complex and have a significant impact on the operating expenses that tenants are required to pay. As such, it is important for tenants and landlords to carefully review the lease agreement and understand the specific terms of the gross up provision before signing the lease. If there are any questions, make sure to consult a professional.