Preserve Right to Pass Through Added Security Costs

Q: A nationally publicized violent incident at a Florida big box store has made me think once again about the level of security I need to keep my center safe for tenants and their customers and employees. Although this most recent retail violence—a customer attacked another customer for bringing more than 20 items into an “express checkout” lane—is out of the ordinary, there have been some minor altercations in my center’s parking lot over the last couple of years. I’m reviewing my security plan to determine whether it’s adequate. If I decide that I need to increase security measures, it may come with a higher price tag.

I think it’s fair to pass through the costs of these increased security measures because my tenants benefit from good security. But one tenant I mentioned this to objected to the idea. Can I charge tenants for this? If not, how can I preserve the right to charge future tenants?

A: Beefing up security at a center may involve adding video surveillance cameras, alarm systems, loudspeakers, or sensors, or hiring more security guards. 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. Whether you can do this depends on whether your 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. In the short term, ask your attorney about whether you can pass through the costs of increased security to tenants under your current leases.

In the future, give yourself this right for new tenants by doing two things:

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. This way, you may be able to recover some costs of the increased security measures as a general security expense.

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. To do this, ask your attorney about adding the following language to your operating expense/CAM cost definition:

Model Lease Language

(x) all costs of security, access control, ingress and egress monitoring, and security systems at the [Building/Center], including, without limitation:

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

(ii) all supplies, materials, equipment, and devices used directly or indirectly in the security of the [Building/Center], and any modifications, replacements, or 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, and any other security personnel.

List increased security measures as permitted 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. 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.

Add a new capital expense exception for increased security measures. This exception will let you include the costs of increased security measures in the operating expense/CAM cost definition. 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. 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].