Today, I am launching a series of blogs dealing with the costs related to the electricity consumption of a commercial building (office, industrial and retail) and more specifically the allocation of these costs to tenants by the lessors in the context of the administration of commercial leases.

Before getting to the heart of the matter and to facilitate the understanding of readers who are not familiar with commercial buildings, it is important at the onset of this new series to identify certain spaces and components of these buildings and to understand how electricity consumption fluctuates in each of these spaces.

The common areas and facilities

The common areas of a commercial building consist of areas that are available and usable by all tenants, such as the lobby, corridors, loading docks, bathrooms, elevators, hoists, etc. Common facilities are the facilities that serve all tenants, even if they do not physically have access to these facilities, such as electrical, mechanical and telecommunication rooms, the air conditioning, ventilating and heating systems, etc.

The electrical energy used to illuminate, ventilate, heat and condition common areas and to operate common facilities is referred to as the building’s common utility consumption. In most cases, this consumption fluctuates little or not according to the occupancy rate of the building or the number of users of the common areas. Every individual who uses common areas and facilities uses neither more nor less electricity than any other individual.

Rental spaces

The rental spaces, as the name suggests, are the spaces reserved for rental use and the occupation by the tenants of the building. These spaces are reserved for the exclusive use of the occupants and their visitors.

Electrical energy used to power computer servers, office equipment, lighting of the premises or any other tenant-specific use is referred to as the leased premises utility consumption. This consumption can fluctuate significantly if a rental space is vacant or occupied. In addition, consumption can vary greatly from one tenant to another depending on the tenant’s area of activity and the equipment installed in the leased premises.

Why bother?

For the majority of commercial tenants, it is important that the lease that binds them to their landlord provides different rules applicable to the allocation of the costs of the leased premises utility consumption from those of the common utility consumption. Here is why. 

Reason # 1: equity among tenants (the consumer-payer)

As mentioned above, the electricity consumption profile of common areas and facilities is not the same as that of each rental space in the building. It is therefore important that the consumption of each type of space is measured separately and that the costs of this consumption are charged to the actual users, in order to ensure equity between each of these users.

As the use of the common utility consumption of the building is the same for each individual (occupant or visitor) circulating in the building, it is necessary to equally distribute the cost of this consumption to these individuals. The number of individuals attributable to a tenant is generally directly proportional to the size of the tenant’s occupancy. It is therefore fair to charge the common utility consumption of the building to the tenants according to their proportionate share of occupancy of the building. If a tenant occupies 10% of the rental space of the building, he will be charged 10% of the common utility consumption.

As for the leased premises utility consumption, it is important that it be measured separately for each tenant since per square foot consumption can vary enormously from one tenant to another. A dry-cleaner will use a lot more electricity per square foot than a professional office. Similarly, two professional offices will probably have different consumptions per square foot depending on the equipment installed in these offices. For example, one of them might host a very large computer server and the other one might not. The allocation of the costs of the leased premises utility consumption according to the proportionate share of occupancy of the building is therefore not a fair allocation method. The fairest way to allocate these costs is to specifically measure and allocate its actual consumption to each tenant of the building. This can be achieved by installing separate electricity meters specifically measuring the consumption of each tenant.

Reason # 2: It’s illegal to make a profit on the resale of electricity

Under the terms of the Hydro-Quebec Act and the Regie de l’energie Act, it is prohibited for any person or entity in Quebec to make a profit on the resale of electricity to the end user of this energy. For the purpose of applying these regulations, these two entities consider that the end user of the common electricity consumption of a building is the proprietor while the end user of the leased premises electricity consumption is the tenant.

The owner has no choice but to distinguish between the two types of consumption in order to comply with these laws and regulations. Since it cannot make a profit on the resale of electricity from the leased premises, it cannot add to the cost thus charged to the tenants any administration fees (15% or other) because these fees are equivalent to a profit margin.

Reason # 3: the calculation of gross-up clauses

Some leases include a clause that allows a landlord to artificially increase certain expenses that vary according to the occupancy rate of a building and to charge the tenants, as additional rent, this grossed-up expense. Explanations of the rationale and calculation methodology for this artificial increase will be developed in a series of blogs that I will have the opportunity to publish shortly.

For now, let’s just emphasize that since the common utility consumption of a building does not generally vary according to the occupancy rate, it must therefore be excluded from the calculation of the gross-up. It must apply solely to the leased premises utility consumption.

Next blog.

What are the errors, intentional or unintentional, that the lessors most often make when charging the cost of the electrical consumption to the tenants of a commercial building? Do not miss my next blog to find out …