August 29, 2012

How much is “reasonable” to pay a landlord as an administration fee?

As an owner of a business that leases commercial space, have you noticed a term in your lease agreement that stipulates the following: “the Tenant promises to pay the Landlord’s reasonable administration, management or supervisory fee as Additional Rent”? Too often, this clause or a similar clause is found in commercial lease agreements instead of a precise method of calculating the administration fee.

If this clause is in the Lease, it allows the Landlord to charge a fee for fulfilling his administrative duties as landlord, as long as the fee being imposed is reasonable. The question that remains however is what is reasonable?

Ideally, a commercial tenant should negotiate how the administration fee is to be calculated and have it drafted into the lease. However, if you have an existing lease that contains a vague clause, or you are unable to negotiate a more precise clause into a new lease, then it would be helpful to know what is deemed to be reasonable.

Case law suggests that a reasonable fee is determined by the conduct of the parties and what is common practice in commercial lease relationships. It is common commercial practice for landlords to charge an administration fee based on 15% of the expenses paid by the landlord and charged back to the tenant as a component of Additional Rent, such as insurance premiums and maintenance expenses. However, property taxes are often excluded from the 15% calculation.

If you are operating under an existing lease, you may want to ask your landlord for a detailed explanation of how the administration fee is being calculated.  This will not only help to establish a consistent method of calculating the fee for the future, but it will also give you an opportunity to re-negotiate this amount if the calculation is not in keeping with common commercial practice. It is best to ask for this calculation early on in the term of the lease before a precedent for calculating the fee is established. In later years, it may be difficult to argue that the landlord has been charging an unreasonable amount, when you have accepted the practice for a number of years.