Unless it is a short-term lease, every New York City commercial lease contains at least one rent escalation clause. There are several types, but, in general, these clauses increase the rent — and other tenant payment obligations — on a fixed schedule (which is often yearly). This article includes topics for commercial litigation, landlord-tenant, and NYC commercial leases and discusses several types of rent escalation clauses focusing on inflation-based escalation clauses. You will need the help of experienced NYC commercial lease lawyers like the Wright Law Firm to ensure you understand a commercial lease’s escalation clause.
Common Types of Escalation Clauses in NYC Commercial Leases
In general, New York City commercial leases contain three escalation clauses. These are:
- Fixed percentage escalation clauses. These are generally base rent increases fixed by a percentage and are year-to-year. Thus, as an example, a fixed escalation clause might set the increase at 3% per year over the lease term, compounded. Therefore, if the original base rent is $10,000 a month, with a 3% escalation clause, the base rent will be $10,300 in year two, then $10,609 in year three, etc.
- Event-triggered escalation clauses. Some events specified in an NYC commercial lease can trigger rent increases. The most common example of an event-triggered escalation clause is an increase in the NYC lessor’s operating costs or Common Area Maintenance (CAM). Operating costs generally include such expenses as real estate taxes. Thus, for example, if the lessor’s property taxes increase, the escalation clause would automatically increase the tenant’s obligation to pay more for CAM. Sometimes, tenants can negotiate that a rent/CAM obligation only increases if the lessor’s operating costs rise by a certain percentage.
- Inflation-indexed escalation clauses. These rent escalation clauses are not fixed but are variable year-to-year based on an inflation index such as the Consumer Price Index (“CPI”). Thus, for example, let’s assume that the New York City commercial lease contains a CPI escalation clause, and the base rent starts at $10,000. If the CPI increases by 3% in the first year, the base rent will be $10,300 in year two. Then, if the CPI increases 8% the following year, the base rent will be $11,124 in year three, etc.
Anticipated Escalation Clauses Post-Pandemic
Many NYC commercial leases contain all three types of escalation clauses. So, a fixed percentage and a CPI escalation clause might be in the lease and provide for a base rent escalation based on the fixed rate OR the CPI increase, whichever is greater. As the U.S. economy moves into an era of higher inflation, prospective lessees must scrutinize these escalation clauses. Prospective tenants must carefully negotiate these clauses to minimize catastrophic economic risks. At a minimum, you will want to fully understand your NYC commercial lease’s obligations.
Contact the NYC Commercial Lease Negotiators at Wright Law Firm NYC Today
Call the experienced New York commercial lease and real estate attorneys at Wright Law Firm NYC for more information. We provide top-tier commercial real estate legal services for the NYC business community. To schedule a consultation, contact our office by e-mail or call us at (212) 619-1500.