How to Compromise on "Sunset Clause"

Put four things in a clause excusing tenant for costs billed long after they were incurred.

The Insider recently wrote about incorporating a contractual statute of limitations into the lease that limits how long tenants can bring or threaten to sue you for lease violations that you allegedly committed years earlier (see “Give Tenants a Limited Deadline to Sue You for Lease Violations”). A statute of limitations on old lease claims can cut the other way, too.

Some tenants’ attorneys ask for a so-called “sunset” provision that bars a landlord from waiting longer than a certain period—such as two years—to bill the tenant for a charge. Tenants argue that if there are bills to be paid, they should be invoiced as soon as possible after the charge is first incurred and that it’s unfair for the landlord to take years before sending the bill. An aggressive tenant lawyer will demand a sunset period of no longer than 12 months.

You should be reluctant to give in to these demands, cautions a New York City attorney. It would be perfectly fair to question how a landlord’s lack of oversight and failure to bill promptly hurts the tenant. “After all, being asked to pay a bill two years later than it should have been paid and to do so without interest or penalty is actually a gift that a tenant should welcome.”

But the tenant will argue that being billed late makes budgeting difficult while adding unpredictability to its accounts payable protocols. And if the tenant has strong negotiating clout, you might have to agree to some kind of contractual statute of limitations on old lease charges.

The New York attorney recommends a compromise approach that you can follow if you find yourself in this situation. Like our Model Lease Clause, the compromise should do four things to protect you.

1. Limit Clause to Particular Kinds of Expenses

While the sunset provision could extend to any form of additional rent and miscellaneous charges like real estate taxes, common area maintenance costs, and operating expenses, you can take some of the bite out of it by restricting it to particular kinds of costs. Thus, the waiver portion of the Model Lease Clause applies only to taxes.

2. State that Delay in Billing Isn’t Automatically a Waiver

Indicate that failure to prepare and deliver statements or demand payment of taxes (or other form of additional rent due under the lease to which the sunset provision applies) doesn’t constitute a waiver. “The structure of the clause is to establish the presumption that a delay isn’t a waiver and then specify what has to happen to override that presumption and show that a waiver has occurred,” the New York City attorney explains.  

3. Make the Sunset Period as Lengthy as Possible

Waiver should occur only after a lengthy sunset period, such as two or three years, advises the attorney. “You want to give yourself as much time as possible to identify and correct potential billing oversights and invoice the tenant.”

4. Carve Out Billing Delays that Aren’t Your Fault

Last but not least, indicate that the waiver doesn’t include delays caused by the tax agency, vendor, or other person or entity from whence the billed charges arose. “There may be occasions when the reason for failing to bill is because you didn’t actually receive the invoice from the third party.” So, set two conditions for the landlord’s delay in billing the tenant to constitute a waiver of the landlord’s right to bill and collect the charge from the tenant:

• The landlord must actually receive the overdue invoice; and
• The landlord must fail to bill the tenant for the resulting charge by the end of the sunset period.

MODEL LEASE CLAUSE

Set Limits When Waiving Right to Bill Tenants for Old Costs

You’d think a tenant would be delighted at not having to pay lease costs for which it’s responsible until years after you incur them, as long as it doesn’t have to pay a penalty or interest. However, some tenants want to be billed as soon as possible after charges are incurred and complain that billing delays play havoc with their budgeting and accounts payable protocols. Those tenants may push for the inclusion of a so-called sunset provision in the lease that excuses them for costs that the landlord doesn’t bill by a certain period of time. If you have to give in to such demands, be sure to include some limits. Here’s a Model Lease Clause setting out a compromise approach created by a seasoned New York City attorney that you can adapt, with the help of your own attorney.  

EFFECT OF TARDY INVOICES

Landlord’s failure during the Term of the Lease to prepare and deliver any of the foregoing tax statements or Landlord’s failure to make demand for additional rent due hereunder shall not in any way waive or cause Landlord to forfeit or surrender its right to collect any of the foregoing items of additional rent which may become due during the Term of the Lease, provided that Landlord shall waive any right to collect as additional rent, any increases in Taxes not invoiced to Tenant within three (3) years after the end of the relevant Comparison Tax Year. Notwithstanding the immediately preceding sentence, if the Tax Authority failed to promptly bill Landlord for Taxes, Landlord shall be deemed to have waived any increase in Taxes arising from such overdue invoices only if:

(a)        Landlord receives from the Tax Authority the overdue invoice; and

(b)        Landlord fails to bill Tenant for the resulting increase in Taxes within three (3) years after the date Landlord receives such overdue invoice from the Tax Authority.