Updated on April 28, 2021
This is a general introduction into the gross up provision within commercial leases. What is the gross up provision? The gross up provision is basically a clause that allows landlords to recover some of the operating costs they would be getting from vacant units, from existing tenants.
Typically, in buildings with multi tenants the landlord divides the operating, maintenance, and utilities utility costs (“Variable Cost”) amongst the occupants. This division is usually based on each tenant’s proportionate share of the building area. Assuming a fully-leased building (i.e., 100% occupancy) the respective share of the Variable Cost paid by each tenant covers the entire amount. The same is not true during vacancy periods. Charts 1 through 3 below illustrate this point. In general, leases without a grossed-up provision burdens the landlord into paying deficiencies in the Variable Cost.
Chart 1
Chart 2
Occupancy: 50%
Total Variable Cost: $50.00
Tenant 1 (Occupies 25% of Building): $12.50 (50*.25)
Tenant 2 (Occupies 25% of Building): $12.50 (50*.25)
VACANT:
VACANT:
Total Paid by Tenants: $25.00
Landlord Pays: $25.00
In a rental market known for its fluctuations, vacancies are not that uncommon. Thus, to avoid having to pay for deficiencies in the variable cost landlords include a “gross up” provision in their leases. This way landlords are able to “gross up” the Variable Cost to a negotiated occupancy rate – usually 95% or 100%. As Chart 3 illustrates below, with a grossed-up provision in place landlords pass most if not all of the Variable Cost to the tenants during periods of vacancies.
Chart 3
Occupancy: 50%
Total Variable Cost: $100.00¹
Tenant 1 (Occupies 25% of Building): $25.00 (100*.25)
Tenant 2 (Occupies 25% of Building): $25.00 (100*.25)
VACANT:
VACANT:
Total Paid by Tenants: $50.00
Landlord Pays: $0.00
Because many of these multi-tenant leases include a gross up provision, it is important that they only account for those costs that actually vary by rates of occupancy—e.g., electricity, utilities, trash removal, management fees, and janitorial services. Fixed costs that have nothing to do with changes in occupancy, such as taxes and insurance, must not be considered.
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See related: Commercial Lease Indemnity Provisions