My previous blog, dealing with the costs of electricity consumption of a commercial building, revealed the errors, voluntary or involuntary, that landlords most often make when they re-invoice these costs to tenants as additional rent.

I am now going to share with you two real-life cases that demonstrate how unethical some landlords are in their way of charging tenants the additional rent on electricity consumption.

CASE #1: A big «deal»

The tenant occupies a considerable area in a very large office building in Montreal. In the tenant’s lease, the definition of the common operating costs of the building clearly indicates that these costs must be calculated by the lessor in a reasonable manner and without duplication. The definition also indicates that only the electricity consumption of common areas is part of the common operating costs. Another section of the lease states that the electricity consumption of the leased premises will be measured by sub-meters (installed at the tenant’s expense) and that this consumption will be billed at the regular hydro rate.

During the execution of the audit mandate covering a three year period, I confirmed that the lessor actually measured the actual consumption of the tenant (and all the tenants of the building) using sub-meters. In addition, the rate per KWh billed to tenants by the lessor was consistent with the rate they would have paid had they been billed directly by Hydro-Quebec. On the other hand, I discovered that the lessor was benefiting from a very advantageous supply rate from Hydro-Quebec and that he did not share that benefit with his tenants. Because of the difference between the two rates, unbeknownst to the tenant, the lessor realized an average profit of 44% on the billing of the electricity consumption of the leased premises. 

Even worse, the lessor doubled this profit margin. As I explained in the «double dipping» section of my previous blog, in order to determine the cost of the common consumption of the building, the lessor must deduct from the total electricity cost, the amounts invoiced to the tenants for the consumption of the leased premises. In this case however, the lessor deducted from the total cost of electricity, the consumption of the leased premises at the preferential rate, even though he had recovered that consumption from the tenants at the regular rate.

As such, the lessor was enriching himself by more than $ 2 Million over the three-year period: $ 1 Million of illegal profit margin on the billing of the leased premises consumption plus $ 1 Million + 15 % administration fees on overestimating the consumption of common areas.

Since the manner in which the lessor generated profit on the resale of electricity was illegal, my client was able to claim a 14-year retroactive adjustment for the consumption of the leased premises, regardless of the three-year legal limitation period. The landlord also committed to amend its billing of the tenant’s consumption for the remainder of the lease term.

Thanks to the audit, the tenant was able to make huge savings on electricity costs (not to mention the other savings discovered during the mandate):

• Leased premises consumption: retroactive savings of $ 525,000 plus future savings estimated at $ 30,000 annually for the remainder of the lease term;
• Common area consumption : $ 124,000 for the three year period under review;

CASE # 2: Switch it off !

The tenant, a large-surface retailer, occupies a store in a regional shopping center in a northwestern suburb of Toronto. The center is composed of my client’s building, three other commercial pads and a 4-storey office building. The tenant has an electricity meter for the consumption of his building and is billed directly by the energy supplier. The tenant’s lease stipulates that he must pay his proportionate share of the electricity of the common areas. The lease clearly states that only the consumption of the outdoor parking pole lights and of the pylons are part of the common areas. My client gave me the mandate to audit the rent charges for the last five financial years of the lessor.

As documentary evidence to support the common areas electricity cost, the lessor submitted an invoice issued by the energy supplier for each month of the five-year period under review. On these invoices were identified, among other things, a meter # and the address of the meter location.

During my physical inspection of the centre on a beautiful summer afternoon, I asked the manager to visit the electrical room. It was located in the basement of the office building and contained five electrical panels all clearly marked with tags. I quickly located the electrical panel that corresponded to the meter # on the invoices to find that it was identified as «office building». I asked the manager again if this was the panel controlling the outdoor lighting and he confirmed that this was the case. So I pretended to want to switch-off the main breaker of the electrical panel claiming that it would be of no consequence, but the manager ended the procedure abruptly because the power supply of the office building would be cut for all of his tenants.

I then easily located the electrical panel identified «pole lights and pylons» and I made an appointment with the manager to return to the electrical room at dusk. When I arrived at the site in the evening, the outside lighting was on. We went down to the electrical room and I asked the manager to switch-off the main breaker of the electrical panel «pole lights and pylons”. Finding that the exterior lighting was now off, there was no longer any doubt that this panel controlled the electricity of the common areas according to the lease of my client and that the landlord had knowingly charged to common area costs the consumption of another component of the centre. I took note of the meter # and asked the manager to submit the electricity bills from this meter for the five year period under review.

Following the analysis of these new invoices, I calculated that the cost of electricity for the office building, originally charged by the lessor to the common area costs, was almost four times higher than the actual amount of the common areas consumption. It has been determined that the lessor overbilled my client by $ 85,000 over five years, including 15% administration fee. Since the lessor was forced to correct the procedure for future years, the audit also allowed the tenant to benefit from a recurring cost reduction estimated at approximately $ 20,000 per year. 

Next blog

In my next and final blog on the electricity consumption of commercial buildings, I will have the opportunity to make recommendations to tenants to help them guard against the illicit methods of the lessors regarding the administration of electricity consumption lease clauses.

Do you think you are being overcharged for your electrical consumption? 

If so, do not hesitate to share your concerns in the space provided for this purpose below. If not, wouldn’t it still be prudent to verify?