The Real Deal - June 2013

Date: June 20, 2013

What Does Your Commercial Lease Say About the New Stormwater Fees?
By: Emily K. Lashley, Esq.

It’s been the talk of the town. House Bill 987 passed by the General Assembly in 2012 requires ten major jurisdictions to implement a watershed protection and restoration program and to apply a storm water remediation fee to fund the program by July 1, 2013. So what does this mean for property owners? Residential property owners are subject to a set annual fee ranging from $11 to $195 depending on the county in which your property is located.

It’s a different ball game for commercial property owners. Commercial property will be charged a fee based upon the amount of impervious surface within the property, which includes building footprints, parking lots and garages and walkways. For example, commercial property in Baltimore County will be subject to a fee of $69 per every 2,000 square feet of impervious surface. So who is going to pay for this? Some property owners, such as car dealerships, are likely to feel the brunt of this new fee, while others, such as shopping centers, strip malls and office buildings, may be able to pass this fee on to their tenants.

The real question among landlords everywhere: Does my lease allow me to pass this fee through to my tenants?

Depending on the lease language, for most landlords it will be sink or swim. There are two main sections within a lease to review in determining whether this fee can be passed through: Property Taxes, and Operating Expenses. Generally, the broader the language within these clauses, the more helpful to the landlords.

Property Taxes

It is important to recognize that this storm water remediation fee is not a tax. However, certain definitions of “tax” within a lease may extend beyond the standard definition and permit the landlord to pass the fee through as a “tax” based on the definition in the lease.

Some helpful lease language that includes a broad definition of property tax is as follows:

  • any other levy, charge, or imposition imposed by any governmental authority or political subdivision
  • any imposition imposed upon owners of real estate
  • any other governmental imposition and charges of every kind and nature
  • any other governmental liens, impositions or charges

A narrowly tailored definition, on the other hand, will emphasize the significance of the fact that this fee is not a tax, and therefore hinder a landlord’s ability to pass the fee through to the tenants. This limiting language may include the following:

  • real estate taxes and assessments
  • ad valorem taxes and general and special assessments levied
  • real estate taxes levied on the building and the land.

Operating Expenses

In addition to the section on property taxes, most leases contain language defining operating expenses that are typically charged to the tenants. Again, the broader the definition, the more likely the storm water management fee can be passed through to the tenants. Some helpful clauses would contain the following language:

  • all expenses incurred in connection with the ownership
  • all expenses which Landlord shall pay or become obligated to pay because of or in connection with owning the building
  • all expenditures relating to compliance with statutes, laws, codes, rules and regulations even if applicable after [the lease takes effect]

Consistent with a narrow definition of tax, a limited definition of Operating Expenses, or specific exclusions, will hinder a landlord’s ability to pass through certain fees. The following examples would make it difficult, if not impossible, for a landlord to pass this fee through to a tenant:

  • expenses limited to the expenses incurred for repair and maintenance
  • only those out of pocket expenses reasonably incurred by the Landlord for maintaining the Common Area
  • exclusions relating to the cost of complying with any law, code or regulation, imposed after [the lease takes effect] .

Any landlord entering into a new lease with a tenant, or renewing a current lease, should immediately check the definitions of taxes and operating expenses within their document. The broader the language, the more likely the fee can be passed through to the tenants. If a landlord’s current lease contains limited language or specific exclusions, it is important to review the lease in its entirety as another section may prove helpful in passing the buck.