Operating Expense ‘Gross-Up’ Clauses: When They’re Fair (and When They’re Not)
Operating Expense ‘Gross-Up’ Clauses: When They’re Fair (and When They’re Not)
If your lease includes CAM or operating expense pass-throughs (NNN or modified gross), you may see a clause that allows the landlord to “gross up” expenses.
Gross-up can be legitimate. It can also be written so broadly that it inflates your share of costs in a partially vacant building.
This guide explains how gross-up works, what expenses should (and shouldn’t) be grossed up, and tenant-friendly guardrails to negotiate. (Not legal advice.)
What does “gross-up” mean?
When a building is not fully occupied, some variable operating costs are lower than they would be at normal occupancy.
A gross-up clause lets the landlord calculate certain expenses as if the building were more occupied—so tenants pay a more “normalized” amount.
Example (simplified):
- The building is 60% occupied.
- Janitorial costs are low because fewer suites are used.
- The landlord “grosses up” janitorial as if the building were 95% occupied.
- Tenants then pay their proportionate share of the grossed-up number.
Gross-up is most common in modified gross and office leases (see /blog/modified-gross-base-year), but it can also appear in NNN structures.
When gross-up is reasonable
Gross-up is generally more defensible for variable expenses that move with occupancy, such as:
- janitorial
- common-area utilities
- trash service
- some maintenance and supplies
The concept: tenants shouldn’t get an artificial discount just because the building is temporarily vacant—because if occupancy rises, those costs will rise too.
The problem: gross-up is often drafted too broadly
Tenant issues happen when gross-up applies to:
1) Fixed costs that don’t change with occupancy
Examples:
- property management fee (often fixed or percentage-based)
- security systems with fixed contracts
- roof/structural costs (which also should not be CAM in many cases; see
/blog/roof-hvac-replacement)
If a cost is truly fixed, grossing it up makes no sense.
2) Capital items
If capital replacements are being passed through at all, they should usually be amortized—gross-up shouldn’t magnify them.
3) “All operating expenses”
If the lease says the landlord may gross up “all operating expenses,” it’s a red flag. It can produce a number that’s higher than real-world costs.
Tenant-friendly gross-up guardrails to negotiate
If the landlord insists on gross-up, ask for boundaries like:
- Limit gross-up to variable expenses only (define a list).
- Set an occupancy cap (e.g., gross-up to no more than 95%).
- Require a minimum actual occupancy before gross-up applies (e.g., only if occupancy is below 85%).
- Exclude fixed costs, capital items, and management markups from gross-up.
- Require disclosure of the occupancy assumptions and the math in annual reconciliations.
Also pair this with audit rights and reconciliation deadlines:
/blog/cam-audit-rights
A quick tenant checklist for gross-up language
- Does it define what expenses can be grossed up?
- Does it state the occupancy percentage used (e.g., 95%)?
- Does it exclude fixed costs and capital items?
- Does it require the landlord to disclose calculations?
- Can you audit the numbers?
How BizLeaseCheck helps
BizLeaseCheck flags gross-up provisions and highlights:
- overly broad “gross-up all expenses” language
- missing occupancy caps
- operating expense definitions that include non-operating items
Upload a lease for a fast first-pass review:
/analyze
Not legal advice
This article is for informational purposes only and is not legal advice. Gross-up practices vary by lease language, building type, and market. Use this guide as a checklist and confirm specifics with qualified professionals.