How to Pass Through Costs of Increased Security Measures

Because of the terrorist attacks of Sept. 11, 2001, more and more owners are beefing up security at their buildings or centers. For instance, some owners are adding video surveillance cameras, alarm systems, loudspeakers, and sensors to their buildings or centers. If you're like most owners, you'll want to pass through the costs of increased security measures to your tenants, as an operating expense or CAM cost.

But if your lease is like many we've seen, it may contain this costly loophole: Nothing in the lease authorizes you to pass through the costs of increased security measures to your tenants. So, for example, if you try to pass through the costs of your increased security, a tenant may argue, and a court could agree, that these costs aren't covered in your operating expense/CAM cost definition. Or the tenant may claim that the increased security measures you plan are a capital expense that can't be passed through as an operating expense or a CAM cost under your lease. So you may be stuck footing the bill for those costs, warn New York City attorney Neil E. Botwinoff and Los Angeles attorney Pamela L. Westhoff.

To plug this loophole, make sure you do the following two things, say Botwinoff and Westhoff.

Broaden Scope of General Security Expenses

Most leases include security expenses in their operating expense/CAM cost definitions. But there can be big differences of opinion about what this general category covers. So give a broad list of the types of expenses included in general security expenses, says Botwinoff. This way, you may be able to recover some costs of the increased security measures, as a general security expense, he explains.

Your list should include as many security-related costs as possible—such as wages and salaries of security personnel, supplies, materials, equipment, devices used for security purposes, security system upgrades, and security maintenance contracts, Botwinoff says. To do this, he suggests adding the following language to your operating expense/CAM cost definition:

Model Lease Language

(x) all costs of security and security systems at the [Building/Center], in-cluding, without limitation:

(i) wages and salaries (including management fees) of all employees engaged in the security of the [Building/Center];

(ii) all supplies, materials, equipment, and devices used in the security of the [Building/Center], and any upgrades thereto; and

(iii) all service or maintenance contracts with independent contractors for the security of the [Building/Center], including, without limitation, alarm service personnel, security guards, watch- men, and any other security personnel.

List Increased Security Measures as Included Capital Expense

If you add or replace a security system, or greatly expand an existing one, the costs are likely to be considered a capital expense, rather than a general security expense, warns Westhoff. And, typically, leases don't include most capital expenses in the operating expense/CAM cost definition, which means you can't pass these capital expenses through to your tenants. But there are usually a few exceptions made—such as for capital expenses required by law or those that are cost-saving in nature.

To protect your wallet, add a new capital expense exception for increased security measures, say Botwinoff and Westhoff. This exception will let you include the costs of increased security measures in the operating expense CAM cost definition, says Botwinoff.

To do this, make sure that the operating expense/CAM cost definition includes the capital expenses that you determine, in your sole discretion, are necessary to enhance security systems and improve security measures at your building or center, says Botwinoff. Add the following language to the list of capital expenses that you can pass through to the tenant:

Model Lease Language

(x) Costs for improvements made to the [Building/Center] which, although capital in nature, Landlord determines, in its sole discretion, are necessary to enhance the security systems and improve the security measures at the [Building/Center].

Practical Pointer: A tenant may balk at this language and demand that you be reasonable in your determination of whether the capital improvement is necessary, says Botwinoff. You may have to give in on this point if the tenant otherwise refuses to accept this new capital expense category.

CLLI Sources

Neil E. Botwinoff, Esq.: Partner, Tannenbaum Helpern Syracuse & Hirschtritt LLP, 900 Third Ave., New York, NY 10022; (212) 508-6700.

Pamela L. Westhoff, Esq.: Partner, O'Melveny & Myers LLP, 400 S. Hope St., Los Angeles, CA 90071-2899; (213) 430-6000.