The Playbook / Clause 8
CAM & Operating Expenses
Common Area Maintenance; Operating Expenses; Caps; Exclusions; Audit Rights
Operating Expenses (called CAM, or Common Area Maintenance, in retail and shopping-center leases) is the additional rent that the tenant pays to reimburse the landlord for the project’s operating costs. The clause has four pressure points: scope of includable costs, exclusions and carve-outs, caps and gross-up mechanisms, and tenant audit rights. Operating Expenses can range from 1.5x to 3x of base rent over a long-term lease and are typically the most fiscally significant additional-rent line in a commercial lease. Careful review of the OpEx clause at signing is the single best investment of tenant-counsel time.
| Type of cap | Model language | Purpose and advantages |
|---|---|---|
| Year-over-Base Cumulative | “The annual increase in expenses is limited to 5% over the base year expenses on a cumulative basis.” | Fixed amount. Not affected by actual expenses (or decreases). |
| Year-over-Base Compounded | “The annual increase in expenses is limited to 5% of the prior year’s capped amount on a compounded basis.” | Fixed amount. Yields slightly more than cumulative. Most favorable to the landlord. |
| Year-over-Year Cumulative | “The annual increase in expenses is limited to 5% of the prior year’s expenses.” | Calculated on prior year’s actual expenses. Most favorable to the tenant. |
| Year-over-Year Compounded | “The annual increase in expenses is limited to 5% of the prior year’s expenses, calculated on a compounded basis.” | Slightly larger pass through. Cap itself grows. |
What the landlord’s form is doing
Landlord wants the broadest possible OpEx pass-through: full reimbursement of property taxes, insurance, repairs (including capital), management fees, security, landscaping, snow removal, utilities (where common), and reasonable reserves. Landlord prefers no caps, no exclusions, no gross-up of fixed costs at less-than-full occupancy, and minimal audit rights with short response windows.
Landlord may seek to include in OpEx: capital expenditures (either expensed or amortized); landlord’s corporate overhead and G&A; brokerage commissions for new leases; marketing expenses; salaries of off-site landlord personnel; "miscellaneous" or "other operational costs at Landlord’s reasonable discretion"; and reserves for replacement.
Landlord may also resist gross-up because it shifts the cost of vacant space from tenants to landlord, and resist a meaningful audit right because audits create discovery risk and operational burden.
The landlord-form capital rider passes through capital replacements required by laws taking effect after the lease date, capital items intended to reduce operating costs or improve building systems, and security enhancements, with Landlord determining in its “sole and absolute discretion” what is capital, what qualifies for pass-through, and the amortization period, and charging interest on the unamortized balance at prime plus two hundred (200) basis points. Tenant counsel should convert each sole-discretion determination to an objective standard.
What tenants should watch for
Defining the expense pool
Definition: closed list. Push for an "operating expenses" definition limited to actual, reasonable costs incurred by the landlord in the operation of the project, with an exclusive (closed) list of categories. Resist "all costs of any nature" or "including but not limited to" language. The list should specify what is in, not what is out.
Exclusions: robust list. Insist on a detailed exclusion list, even if a closed-list definition is accepted. Standard tenant-favored exclusions:
Additional exclusion categories. The tenant-side wish list of CAM exclusions include: the cost of space occupied by Landlord’s property manager or leasing agent; costs attributable to vacant space; special services supplied to other tenants; insurance deductibles and self-insurance payments; amounts paid to Landlord affiliates in excess of competitive market rates; ground-lease rent; acquisition, display, and insurance of works of art; holiday decorations; interest and penalties for Landlord’s late payments; judgments and liens against Landlord; and costs resulting from Landlord’s negligence or default. Introduce the exclusion list with language such as: “In determining Tenant’s Proportionate Share of Operating Expenses, the following items shall be excluded.”
No duplication of fees. Where the lease permits both an administrative fee and a third-party management fee, the two charges substantially overlap; include an express provision that there shall be no duplication of charges under the lease.
Pro rata share denominator. Scrutinize the fraction, not merely the cost pool. Confirm whether the denominator is leased or leasable floor area; if anchors or majors are excluded from the denominator, require that their CAM contributions be credited against the cost pool before Tenant’s share is computed, or Tenant subsidizes the anchors’ below-market contributions; and watch minimum-occupancy floors (for example, deeming the center at least eighty percent (80%) leased) that shift vacancy costs among the remaining tenants.
Gross-up at less-than-full occupancy. Demand a gross-up provision for multi-tenant projects below full occupancy. The provision should provide that OpEx that vary with occupancy are grossed up to reflect ninety-five percent (95%) occupancy (or other defined threshold) for purposes of calculating tenant’s Proportionate Share. This shifts the cost of vacant space back to landlord and prevents tenant from subsidizing landlord’s under-leased project.
Base year and expense stop. In a full-service or modified gross lease, Tenant pays increases over a base year or an expense stop rather than a net pass-through. Confirm that the base year reflects a fully occupied, fully assessed building operated on a normal basis, and reserve the right to audit the base-year calculation itself; the base year is subject to Landlord’s control while it is being established, and an expense stop set below realistic operating costs converts the “stop” into an immediate pass-through.
Caps on increases
Caps on increases. Negotiate a cap on year-over-year increases in tenant’s Proportionate Share of OpEx. Three common cap structures: (i) cumulative cap (5% increase per year, compounded from a baseline year, the most landlord-favored); (ii) non-cumulative cap (5% increase year-over-year from prior year’s actual, regardless of cap-fill, more tenant-favored); (iii) aggregate cap (fixed dollar amount, generally only feasible in short-term or stable-cost projects).
Carve out from the cap the "Uncontrollable Expenses": real estate taxes, insurance, utilities, and snow removal. These vary independently of landlord management and a cap on them functionally caps landlord’s ability to operate.
Cap mechanics: refinements. Distinguish year-over-base cumulative caps from compounded caps: a compounded cap is calculated as a percentage of the prior year’s cap and therefore rises faster than a cumulative cap computed from the base year. Pair any ongoing cap with a first-year cap so that an unexpectedly high first-year actual does not inflate the baseline for every later year.
Uncontrollable-expense carve-out discipline. Where a negotiated cap carves out “Uncontrollable Expenses,” landlord forms define the term with an “including but not limited to” list and reserve to Landlord sole discretion to classify additional expenses as uncontrollable. Strike both devices: require a closed list (real estate taxes, insurance premiums, utility rates, snow removal, and collectively bargained labor costs), and subject any residual classification to a reasonableness standard, a concession the landlord bar itself acknowledges tenants can obtain. Management fees remain controllable because Landlord negotiates them; resist their inclusion in any carve-out.
Capital-cost compromise structures. Where capital costs cannot be excluded outright, the landlord compromise set is: (i) inclusion of only the annual amortized portion of the cost in CAM; (ii) determination of useful life by reference to the Internal Revenue Code (which tends to favor tenants by producing the longest reasonable life) but subject to a landlord-favored ceiling (for example, fifteen (15) years) that accelerates recovery; and (iii) a hard annual cap on capital costs included in CAM, expressed as a percentage of fixed rent (for example, ten percent (10%)). Tenant counters: resist or raise the useful-life ceiling, negotiate the annual percentage cap downward, and confirm that amortized capital charges terminate at lease expiration rather than accelerating.
Audit and challenge rights
Audit rights. Tenant should have a robust audit right: (a) window of at least ninety (90) days after delivery of the OpEx statement, with extension if landlord delivers late; (b) tenant’s selection of CPA or qualified internal accountant; (c) access to landlord’s books, records, invoices, contracts, and any other underlying documents; (d) tenant pays the audit cost unless the audit identifies an overcharge exceeding a threshold (3-5% of disputed OpEx), in which case landlord pays; (e) tenant’s right to refund of overcharges with interest at the lease default rate; (f) extended audit window if landlord fails to deliver an annual reconciliation statement.
Specific line-item challenges. Reserve the right to challenge specific line items as outside the OpEx definition or violating the exclusions, with the burden on landlord to demonstrate inclusion.
Audit clause traps. Landlord-form audit clauses concede the audit right and then hollow it out: payment of the statement in full as a precondition; an audit notice that must identify the specific disputed line items; auditors limited to national certified public accounting firms not compensated on a contingency basis; audit commencement and completion windows measured in days; deemed approval of the statement for any procedural misstep; a landlord-drafted confidentiality agreement; and reimbursement to Landlord of photocopying, document-retrieval, and employee-supervision costs. Negotiate each of these out of the clause; the contingency-fee prohibition and the cost-reimbursement provisions most directly deter audits in practice.
Sunset clause on stale billings. Demand a contractual limitation (a “sunset” provision) barring Landlord from billing any charge more than twelve (12) months after the charge is incurred, justified by Tenant’s budgeting and accounts-payable predictability. Landlord counsel will counter by restricting the sunset to particular categories (the published model applies only to taxes), lengthening the period to two or three years, providing that delay in billing is not an automatic waiver, and carving out delays caused by third-party billers. Press for a sunset covering all additional rent (CAM, taxes, and operating expenses) and coordinate the sunset period with the negotiated audit window.
How this typically gets negotiated
Operating-expense negotiations run on four tracks: what categories of cost are includable, which specific costs are excluded (capital items, structural repairs, leasing costs, and the like), whether controllable expenses are capped year over year, and whether the tenant can audit the landlord's books and recover overcharges. Over a ten-year term these provisions routinely matter more than the base rent number.
The specific language that resolves each of these points depends on the deal. Talk to Paul about your lease →
How the states treat it
Majority rule. Operating Expense definitions, exclusions, caps, and audit rights are commercially negotiated; courts enforce express terms. The "including but not limited to" prefix has been interpreted broadly by some courts to permit landlord recovery of categories not specifically listed, and narrowly by others to permit only categories similar in kind to those listed (ejusdem generis). Tenant counsel should avoid the prefix where possible.
Audit rights: duty of good faith. Most jurisdictions imply a duty of good faith in CAM administration, including the obligation to maintain audit-ready records and to provide reasonable access. Landlord’s failure to maintain such records is increasingly cited as breach. Some jurisdictions (notably California) imply a duty to maintain accurate records even absent an express audit right.
Capital expenditures. A significant number of cases turn on whether a particular cost is a "capital expenditure" (typically excluded) or a "repair and maintenance" cost (typically included). The line is fact-intensive; tenant counsel should document the project’s historical practice and any landlord-provided categorization.
Notable cases
Cases interpreting "operating expenses" or "common area maintenance" definitions vary widely by jurisdiction; tenant counsel should research persuasive authority in any state where the project is located.
Regency Square N. Shopping Ctr. 14 LLC v. Kansas Kurry LLC, 394 P.3d 903, 2017 WL 2212088, at *1 (Kan. Ct. App. 2017). A lease amendment obligating the tenant to pay defined “Minimum Rent” for expansion premises, but silent as to defined “Additional Rent,” did not obligate the tenant to pay CAM and taxes on the expansion space; defined rent terms are strictly construed.
Game film: real clauses from real leases
Excerpts from commercial leases filed as exhibits with the Securities and Exchange Commission, trimmed for length. Follow the citation for the full document on EDGAR.
“Notwithstanding anything to the contrary herein contained, annual increases in "controllable operating expenses" on an annualized basis shall not exceed 5% more than such "controllable operating expenses" for the prior calendar year on an annualized basis. For purposes hereof, "controllable operating expenses" means all operating expenses of the Property, except for impositions, insurance premiums, utilities and snow removal. In the event an increase in controllable operating expenses on an annualized basis in any calendar year is more than 5%, the excess may be billed to Tenant in any future calendar year in which the increase in controllable operating expenses on an annualized basis is less than 5% as long as in any calendar year controllable operating expenses are not in excess of 5% more than controllable operating expenses in the immediately preceding calendar year on an annualized basis.”
Why it matters. A 5 percent cap on controllable operating expenses is a classic tenant win, but the carryforward sentence lets the landlord recover capped excess in later years, so tenants should decide whether the cap is cumulative and compounding or a hard annual ceiling before signing.
“Upon reasonable notice from Tenant, Landlord shall make available for inspection, by an accountant or consultant selected by Tenant and reasonably approved by Landlord, at Landlord’s office in the Building, during normal business hours, Landlord’s books and records relating to the Escalation Rent for the previous calendar year. Such inspection shall be at Tenant’s own expense. The accountant/consultant shall not be retained by Tenant on a “contingency” basis. Tenant shall in no event have the right to inspect Landlord’s books and records more than one time per year. Tenant’s failure to request an inspection within sixty (60) days after delivery of the Statement to Tenant shall constitute Tenant’s waiver of any right to contest the amounts shown in the Statement. If Tenant’s inspection reveals that Tenant was overcharged for Escalation Rent for Operating Expenses or Escalation Rent for Property Taxes and Landlord does not dispute such findings, the amount of the overcharge shall be promptly refunded to Tenant.”
Why it matters. This audit right comes loaded with landlord side limits, including a sixty day use it or lose it window, a ban on contingency fee auditors, and no cost shifting even for large overcharges, all of which are standard points for tenant counsel to push back on.
“Commencing as of January 1, 2029, in no event shall the amount of Controllable Operating Expenses (as hereinafter defined) included in Operating Expenses for any Lease Year exceed the Controllable Expense Cap (as hereinafter defined) for such Lease Year. "Controllable Operating Expenses" shall mean all Operating Expenses, except for: (i) any utility costs; (ii) any insurance costs; and (iii) the costs of snow and ice treatment and removal. "Controllable Expense Cap" shall mean (i) for the 2029 Lease Year, [ *** ] of the Controllable Operating Expense for the 2028 Lease Year, and (ii) for each succeeding Lease Year, [ *** ] of the amount of the Controllable Expense Cap for the immediately preceding Lease Year. … Operating Expenses shall not include any governmental fees or exactions for housing.”
Why it matters. Even a credit tenant as strong as Vertex negotiated a cap on controllable operating expenses with a short, defined list of uncapped items, which shows that the fight is usually over what counts as controllable rather than over the cap percentage itself.