Operating Costs – they are discussed endlessly during the lease negotiations and then often become the most contentious ongoing issue between landlord and tenant.
The almost universal practice is that at the beginning of each year landlord estimates operating costs and tenant pays in instalments based on that estimate. Shortly after the end of the year the landlord delivers a statement of operating costs for the past year which may be certified or audited depending on the provisions of the lease. Tenant is given a period of time to challenge the statement after which it is deemed to be final and forms the basis of an adjustment between landlord and tenant reflecting the difference between estimated and actual operating costs.
The form and content of the statement is crucial to tenant’s ability to mount an effective challenge to the operating costs.
The Ontario Superior Court of Justice recently considered this issue in 1877352 Ontario Inc. v. 699147 Ontario Inc. (2016) 65 R.P.R. (5th) 327. The facts are “bad” and do not merit a summary except to say the lease provision was conventional if a bit abbreviated. One of the questions before the Court was:
“Is the Landlord Obliged to Deliver Documents that Support the Claim for Additional Rent?”
Of importance to landlords and tenants is the Court’s answer:
“Both parties agree that the tenancy relationship is governed by an obligation to deal in good faith. The duty of the Landlord to honestly and reasonably perform its obligations under this Lease is served by requiring it to deliver all documents that are the basis for the annual adjustment. … In my view, it is commercially reasonable to imply a term into the Lease that requires the Landlord to deliver with its annual adjustment for Additional Rent a copy of all of the documents, such as tax bills, insurance premiums, property management invoices, which support and explain the amounts claimed from the Tenant in the adjustment.”
Such a statement goes far beyond what most landlords currently deliver and, absent an express audit right in the lease, what tenants generally have access to.
It may even be that until the detailed statement (and supporting material) required by this Court is delivered, any period of time a tenant has to dispute that statement will not run.
Bram Costin (with assistance from Erin Chesney)