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Managing Management Fees


January 22, 2014


Scott Smythe

Landlords hold their management fees dear, and need to ensure they are fully recoverable. Offers to lease routinely provide that the tenant will pay a management fee equal to a fixed percentage (say, 5%) of the "Basic Rent" payable by the tenant. Despite this clear contractual arrangement, landlords occasionally (and inadvertently) shortchange themselves when preparing the final form of lease.

Consider an offer to lease for a multi-tenant building. The offer says that the lease will be a "net" lease and that the tenant will pay its "Proportionate Share" of "Operating Costs." The offer also says that the tenant will pay 5% of its Basic Rent as a management fee. So long as the form of lease prepared by the landlord provides for payment of the management fee, separate and apart from Operating Costs, there is no issue; however, all too often, the management fee obligation in the offer to lease is carried over into the lease, verbatim, as a component of Operating Costs (for which the tenant is to pay its Proportionate Share). The net result is that, instead of obligating the tenant to pay 5% of its Basic Rent as a management fee, the lease requires the tenant only to pay its Proportionate Share of 5% of its Basic Rent (which will necessarily be less than the management fee contemplated by the offer to lease). To avoid an unexpected, adverse impact on cash flow, landlords need to ensure that the management fee is payable separately from Operating Costs or, if it is to be a component of Operating Costs, that the definition of Operating Costs provides for a management fee equal to a fixed percentage of all basic rents payable by all tenants.


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