Is Your Business Paying Too Much For Electricity?

Landlords Can Exploit the Electricity Clauses in Their Leases Causing The Tenant To Over-Pay. This is Why Your Office Electricity Bills are So High.

One of the best-kept secrets in the commercial real estate business (or at least one of the most lucrative secrets) is the degree to which electricity clauses are exploited in office leases to create a profit center for the Landlord. Virtually every tenant overpays for electricity, so you may be left wondering: why is my electricity bill so high? And how can I prevent this in my next lease? That’s where we come in. 

In NYC, electricity is either billed by a meter to the public utility (like you’d have in your home) or by something called rent inclusion; here’s how it works:

 

Direct Meter and Submeter: If your Landlord is billing via a direct meter, you’ll see language in your lease around electricity being directly metered or submetered at a percentage of actual cost. As tenant reps, we always do our best to negotiate directly metered electric, as this is reflective of actual cost and therefore a pass through for the Landlord rather than a profit center. Most landlords will push for submetering at over 100% of actual cost; we’ve seen this go as high as submetered at 110% of your actual cost, meaning you’re now paying an additional 10% over and above what you actually use – you guessed it, right to the Landlord. 

Rent Inclusion: Landlords typically advertise rent inclusion electric at $3.25 or $3.50 per rentable square foot (sf). The question most tenants don’t ask is, “how much electricity do I actually use?” If you’re an average office tenant with computers, phones, and basic business equipment, you use about $2.00/s.f. per year. So right off the bat, landlords are making an extra dollar or two per foot per year on your deal without anyone being the wiser.

To make matters worse, your electricity clause can also be a double edged sword; the electric clauses in leases are generally about ten pages long, and they’re as complicated as the philosophy you tried so hard to understand in college. One example of a common error is that tenants assume that the $3.50 per square foot they sign up for is what they will actually be billed, and don’t pay adequate attention to what the lease actually says. Ultimately there must be some correlation between what you use and what you pay. Landlords handle this by giving themselves the right to “survey” your consumption of electricity.

Once a lease is signed, and in many cases before even a year of term goes by, the landlord will send an electric consultant to the tenant’s office to conduct an “electrical survey” of the premises. This consultant will produce a report that the landlord will send to you which will likely indicate that you are consuming more electricity than was expected and that as per your lease you will have to pay more for your use.

Landlords routinely make reference to something in their electric clauses called “connected load”. This means that when it comes time to survey (and raise your bill), the surveyor is allowed to presume that every electrical device you have is turned on and being used at full capacity 24 hours a day, 7 days a week. This is not fair or accurate, but tenants and lawyers miss this distinction all the time. What is fair and accurate is a tenant being billed on their “demand load” – or what they actually consume.

Because its perfectly legal and written into the lease (but often missed), this practice of surveying you and incrementally increasing your electric bills can go on for years and in some cases can become so egregious that a tenant will end up paying tens of thousands of dollars a year in additional electricity. Fun fact: one major landlord in NYC includes in all its first draft leases the right to survey and increase the tenant’s cost for electricity if the price of electricity has gone up since July 1st 1970 in all its first draft leases; this is not a typo – 1970! 

Many a smart business owners (and their attorneys) miss this and other like-minded electrical clauses, or presume that submetering above 100% is market – and then they end up paying the price. This is a common problem and a time tested profit center for landlords – so make sure you have a knowledgeable tenant representative real estate broker and real estate attorney that look carefully at the these onerous electrical clauses so they can be altered to reasonably and accurately portray what you actually consume in electricity.