“Reasonable” means different things to different people. Worse, as soon as a commercial tenant has a disagreement with their landlord and points to the “reasonable” term, even if the landlord agreed before, suddenly reasonable is defined however they need it to be in that moment.

For example, a number of triple net leases contain the following provision:

“Reconciliation: Within a reasonable time after the end of each calendar year, Landlord will notify Tenant of the actual costs of the applicable expenses (those that Tenant is to pay under this addendum) for the previous year…. Landlord may not seek a deficiency from Tenant under this paragraph if Landlord fails to timely provide the required notice.”

What happens when the landlord sends the reconciliation for the previous year in July? Given that July is more than half way through the year, from the tenant’s perspective that is pretty unreasonable. Of course, the landlord will insist that July is perfectly reasonable. So who is right? In reality, we don’t really know. The tenant has a good argument that they are correct as most reconciliations happen before the end of the second quarter at the latest. Unless the tenant wants to take the matter up in court they may be stuck with the landlord’s interpretation or face a lock-out for a payment deficiency.

The good news is that there is a better solution for the tenant. As you negotiate your lease agreement, define the term “reasonable” wherever it appears in the lease. Rather than changing the standard industry lease (which causes real estate agents to panic), we typically add an addendum with the definitions. It might look something like this:

DEFINITIONS ADDENDUM

1.    Commercial Lease Addendum for Expense Reimbursement, Paragraph D. The term “reasonable” in this section shall be defined as any time before March 31st each year.

Now if the landlord doesn’t provide a reconciliation prior to the defined time the tenant cannot be held liable for any payment deficiency. The time can be negotiated as part of the terms. The real goal is to ensure there is no ambiguity. Defining these terms truly benefits both the landlord and the tenant. For the landlord, if the tenant pushes the matter in to court the litigation costs can be pretty high and it is unlikely they will ever be recovered. For the tenant, it assists with budgeting and ensures that the landlord can’t change their mind about what reasonable means down the line.

 

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