Need help with your Real Estate Law case?

A Guide to Rent Escalation Clauses in a Long Island Lease

Today, the majority of commercial lease agreements in Long Island will contain a rent escalation clause. This standard section of the lease delineates the terms for how and when rent increases throughout the lease term. There are several ways to structure a rent escalation clause, and the exact terms can become a major point of negotiation between a Long Island tenant and landlord.

What should a tenant or landlord know about rent escalation clauses? This article is your guide to learning the basics of rent escalation. However, you probably have many questions about the terms of your specific lease agreement, these questions are best directed to a Long Island real property lawyer.

Why Is the Rent Escalation Clause Important?

The goal of a rent escalation clause is to keep the amount of monthly or annual rent consistent with a rise in property value, maintenance costs, and inflation. As all of these numbers rise, the landlord is incurring more costs and losing money in opportunity costs by not finding a higher-paying tenant. This leads to a strong argument that over the course of a lease term, the tenant should help cover these costs.

In a Long Island commercial lease, the rent escalation clause will determine how steeply rent rises over the lease term. There isn’t just one method for setting the amount and terms of rent escalation. A commercial lease could incorporate one of several different methods, each having a different impact on the increase in rent over time.

Negotiating a favorable rent escalation clause, including the method used, should be high on a landlord and tenant’s list, as the financial repercussions could be substantial.

What Are the Methods of Rent Escalation?

There are several ways to structure a rent escalation clause in your commercial lease agreement. It is possible that the rent increases by a set, the specific amount each year. This fixed amount is stated in the lease as either a whole dollar amount or as a percentage of base rent paid the previous year. For example, a fixed escalation could be a jump from $10,000 to $10,200 or a 2% increase in rent. When a fixed escalation clause is used, both parties want to ensure only modified by a negotiated amendment to the lease.

Another rent escalation structure is to increase rent based on inflation. The parties agree that rent will increase by a certain percentage, not based on the current base rent, but on the Consumer Price Index (CPI), or another inflation index.

Finally, rent can be tied to the total amount of costs the landlord incurs each year to own the building. In this instance, the landlord reports to the tenant the cost of building maintenance, operation, insurance, taxes, and other costs as may be agreed by tenant and landlord. Then, the tenant pays a percentage of those costs, plus a set base rent. This percentage is frequently determined by the square footage that the tenant rents compared to the total square footage of the commercial building.

Considerations of Each Rent Escalation Clause

Each of these methods of rent escalation has pros and cons for a Long Island landlord or tenant to consider. For example, when rent is tied to the operating and maintenance costs incurred by the landlord it can be difficult or burdensome for the tenant to verify these costs. There is some requirement of honesty and trust involved in this process, or the tenant and landlord must agree to an audit process that serves both parties.

Another drawback to basing rent escalation on landlord’s costs is ongoing issues with definitions and defined terms. For instance, it must be specifically stated in the lease what expenses are included in operating costs. Failure to define this term, and many others, leads to conflict when the landlord includes a cost that it feels is clearly an operating cost, but the tenant disagrees.

Problems with other rent escalation clauses are just as common. When landlords and tenants negotiate without a commercial real estate lawyer, the lease may utilize a rent escalation clause based on a CPI, but not state which one is applicable. There are several Consumer Price Indexes, and they may not report the same results each year, causing a lease to be ambiguous.

Finally, a fixed rent increase is straightforward to draft a lease agreement, making it a popular choice for tenants and landlords, but it is rigid in its application. If a building’s value significantly rises in a given year, then the landlord may feel cheated out of substantial opportunity costs to raise the rent further. In contrast, the operating costs of the building could drop because of new technology or change in utility services, but the tenant wouldn’t see any of that windfall.

What Rent Escalation Clause Should You Use?

The landlord frequently provides the first draft of a commercial lease. This is, at least, customary. Therefore, it is most often the landlord that dictates what method of rent escalation clause is used in a Long Island lease agreement.

A tenant is permitted and sometimes encourage at the advice of a Long Island commercial real estate lawyer, to question and rebut the use of a particular escalation clause. Property value, the condition of the building, planned maintenance, new economic policies in New York, and a number of other reasons could make one escalation clause favorable over another. A real property lawyer, such as Sami Perez in Long Island, is going to be your best source of advice regarding the considerations and facts that are determinative for your lease.

To contact the Law Office of Samilde Perez, call our Long Island-based law office at 516-216-5060.



The information in this blog post (“Post”) is provided for general informational purposes only, and may not reflect the current law in your jurisdiction. No information contained in this Post should be construed as legal advice from The Law Office of Samilde Perez or the individual author, nor is it intended to be a substitute for legal counsel on any subject matter.