9.11 C. IndeXIng The Rent

JurisdictionNew York

C. Indexing the Rent

As an alternative to a complex operating expense clause, some landlords index their rents. This lets landlords keep their books private. It also saves tenants from a costly, time-consuming review of expenses that may produce legitimate disagreement.

But be wary. There are a variety of indices, with many subtle variations, in common use and their behavior can vary substantially. It’s surprisingly common for even large, sophisticated companies to be hit by higher rent escalations than they anticipated. In 1969, for instance, Avon Products signed a 27-year lease for nearly half of a 50-story tower in Manhattan. Avon’s rent increases were tied to the “porter’s wage”—hourly wage and fringe benefits hikes that certain employees receive under a union contract. Because the contract calculated fringe benefits on a weekly or yearly basis, Avon’s landlord, Sheldon Solow, had to translate these fringe benefits into an hourly rate.

For 10 years, Solow assumed, for the purpose of his calculations, that the union employees worked a 40-hour week. But in 1980, Solow notified Avon that he was revising his calculations to base them on the actual hours employees worked—31 hours a week. The effect on Avon was dramatic: its rent would jump $780,000 a year, more...

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