USA Law and Practice Contributed by: Richard L. Rosen, Leonard S. Salis and Dennison Marzocco, Rosen Karol Salis PLLC
6.10 Payment of Utilities and Telecommunications
the entire property and is responsible for the various operating costs of the property – for example, under a so-called “triple net” lease – the tenant, and not the landlord, is responsible for purchasing and maintain - ing all required types of insurance. General liability insurance typically provides coverage for claims aris - ing out of bodily injury or property damage suffered by third parties. Some general liability policies include a specific endorsement that provides limited coverage for fire damage to the leased premises, but this is typi - cally limited and generally does not cover all types of damage or perils (eg, floods, earthquakes, etc) to the leased premises. Commercial tenants are usually required to purchase and maintain business interruption insurance. Dur - ing the COVID-19 pandemic, however, insurers took the position that losses attributable to government- mandated shutdowns were not covered under their business interruption policies. In most litigations throughout the USA, courts largely sided with insurers’ decisions to disclaim coverage under tenants’ busi - ness interruption policies. 6.13 Restrictions on the Use of Real Estate Commercial leases typically contain a “use” clause which describes the tenant’s permitted use of the premises. The scope of this clause is negotiated between the parties and is frequently influenced by their respective bargaining strengths. Leases usually specify certain prohibited uses or activities. Local land use and zoning laws may impose further restrictions on the tenant’s use of the premises. Retail tenants in a shopping mall or strip centre may seek to negotiate an “exclusive use” provision, where the landlord agrees not to lease other premises located in the shopping mall to a competing business. Sometimes, with a financially strong tenant (such as an “anchor” ten - ant), the tenants’ exclusive use provision may extend to surrounding locations also owned by the landlord. 6.14 Tenant’s Ability to Alter and Improve Real Estate Commercial leases typically require the tenant to obtain the landlord’s written consent before the tenant is permitted to alter or improve the demised premises. Usually, leases also require that all plans, drawings and specifications be submitted to the landlord for its
Most commercial leases provide that the tenant is responsible for arranging and paying for its utilities and telecommunications services (other than for water, for which the landlord may bill the tenant based on the tenant’s usage of water as read by a “meter”). Usually, most utility costs for the common areas of the building are billed to the tenants (in addition to the base rent), based on their respective proportionate shares of the There is no standard answer as to who is respon - sible for paying real estate taxes under commercial leases, because this will vary depending on the type of commercial lease. However, in many commercial leases, which are “modified gross” leases, tenants are required to pay their “proportionate share” of real estate tax increases over a negotiated “base year” as opposed to the full amount of real estate taxes. For example, if the tenant occupies 20% of the total rent - able space in the building, the tenant’s proportionate share is 20%, so that, if the increase in taxes over the base year after the tenant’s first year in possession (often the first year of the lease) was USD100,000, the tenant’s proportionate share of the real estate taxes would be USD20,000. Notwithstanding the above, in many “net leases” (eg, “absolute” leases, “triple net” leases, “double net” leases and “single net” leases), the tenant is obligated to pay all of the real estate taxes, whereas the landlord is responsible for paying some of the other operating expenses, depending on the type of net lease (except that in “absolute” and “triple net” leases, the tenant is responsible for paying all of the operating expenses, including taxes). total leasable space in the building. 6.11 Payment of Property Taxes With respect to residential leases, the owner/landlord usually pays all the real estate taxes assessed on the property. 6.12 Insurance Issues While landlords purchase and maintain their insur - ance with respect to the property, it is standard for commercial leases to require each tenant occupying a portion of the property to purchase and maintain – at its own cost and expense – specified levels and types of insurance. Where a single tenant occupies
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