Stop Clause

A clause in a lease agreement that stipulates the amount of operating expenses above which the tenant is required to pay. It protects the lessor by ensuring that any increase in operating expenses is covered by the tenant once a predefined threshold is reached.
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Definition

A Stop Clause in a lease agreement is a provision where the tenant agrees to pay operating expenses that exceed a specified base amount. This base amount generally corresponds to the operating expenses during the first year of the lease. The base year serves as a benchmark, and any increase in costs in subsequent years would be the tenant’s responsibility, thereby protecting the landlord from rising expenses.

Examples

  1. Commercial Lease: A tenant leases a commercial space with a base year’s operating expenses of $50,000. The lease includes a stop clause that states the tenant will pay any operating costs exceeding this amount in subsequent years. If the operating expenses rise to $55,000 the following year, the tenant will cover the $5,000 increase.

  2. Office Lease: An office lease agreement sets the base operating expenses at $20,000. In the third year of the lease, operating expenses reach $22,500. Due to the stop clause, the tenant is responsible for the $2,500 difference.

FAQs

1. What is the purpose of a stop clause?

  • The stop clause protects the lessor from increasing operating expenses by transferring the excess costs to the tenant once a specific threshold is surpassed.

2. How is the base amount for operating expenses determined?

  • The base amount is typically the operating expenses for the first full year of the lease agreement and serves as a benchmark for future comparisons.

3. What types of expenses are included in operating expenses for a lease?

  • Operating expenses can include maintenance costs, utilities, property taxes, insurance, and any other expenses necessary for the operation of the property.

4. Is a stop clause common in all types of leases?

  • Stop clauses are more common in commercial leasing but can also be found in other long-term lease agreements where ongoing operating costs can fluctuate significantly.

5. Can the specified base amount for operating expenses be negotiated?

  • Yes, the base amount can be negotiated between the lessor and the tenant when drafting the lease agreement.
  • Operating Expense: Recurring costs required to operate and maintain a property, such as cleaning services, utilities, repairs, insurance, and property taxes.
  • Escalator Clause: A lease provision that allows rent to increase periodically based on an index or a predetermined schedule to accommodate rising operating expenses or inflation.

Online References

Suggested Books

  1. “The Commercial Lease: A Practical Guide” by the American Bar Association
  2. “Negotiating Commercial Leases & Renewals For Dummies” by Dale Willerton

Fundamentals of Stop Clause: Real Estate Management Basics Quiz

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