Do you assume that if the charges would otherwise have exceeded whatever turns out to be the cap, the excess is lost forever, or does it carry forward until exhausted? If it carries forward, what happens at the end of the Lease Term? Would the answer differ if the Lease ended in an unnatural manner—by eviction, by fire or other casualty, by a recapture? I have no idea! I’ve never heard anyone discuss this. Has anyone out there thought about this; encountered this?
Now, back to the starting assumption: Landlord and Tenant have agreed that there will be an annual cap of, say 5%. How do you calculate the cap? From the Landlord’s side, you start with a base – for example the CAM for 2010, let’s say it is $5.00 per square foot. Then you say that the cap for 2011 is 105% of $5.00 – that’s $5.25. Then, you say 2012 is 105% of $5.25 – that’s $5.5125. 2013 would be $5.7881 and so on.
From the Tenant’s side, you’d say that if the CAM was $5.00 per square foot in 2010, then the cap for 2011 would be 105% of $5.00 or $5.25 per square foot. BUT, that’s where the agreement with the Landlord’s drafts person ends. On the Tenant’s side, the cap for 2012 would depend on the actual CAM charged to the Tenant in 2011. For example, if the actual CAM charge for 2011 came to $5.10 per square foot, the person drafting a lease on behalf of the Tenant would say that the cap for 2012 is 105% of the $5.10, and that only comes to $5.355 per square foot.
What does anyone else think the result would be if the LOI is otherwise silent?
The next post will follow-up on this topic by ruminating about what kinds of costs might never be appropriately capped.