Vampire Clauses in Commercial Leases: What’s Draining Your ROI?

This Halloween, be on the lookout for “vampire clauses” — provisions lurking in your commercial leases that could drain your profitability over years or even decades. Unlike their fictional counterparts, these vampires can’t be vanquished with garlic and wooden stakes. Instead, landlords need sharp legal analysis and strategic negotiation to protect their bottom line. Here are some unfavorable clauses to watch out for:

The Property Tax Reassessment Cap

Consider the seemingly innocuous provision exempting tenants from an obligation to reimburse landlords for property tax increases resulting from a sale of the property.  Many large national retailers attempt to include such a clause to limit the potential for a large increase in property taxes when the local assessment officer uses a recent sale price to modify the assessed value of a property. While tenants argue this protects them from costs beyond their control, this clause can leave landlords absorbing a significant annual shortfall that reduces their net operating income and property value.

What to do: Negotiate limits or exclusions on this exemption — perhaps limiting protection to increases exceeding a certain percentage annually, excluding reassessments that bring the property to market-rate taxation levels, or allowing an increase to be passed through if the property is sold once or twice during the initial term.

The Controllable Expense Exclusions

This provision can sometimes involve overly restrictive controllable expense definitions. Tenants frequently negotiate caps on “controllable” expenses, which sounds reasonable until you examine what tenants classify as controllable, including insurance premiums that skyrocket after a regional natural disaster, utility costs that surge due to grid failures and market conditions, security expenses that increase following area crime spikes, and more. These definitions force landlords to absorb costs that no reasonable property owner can actually control. The result is margin compression that worsens during the precise moments when operating costs spike industry wide.

What to do: Negotiate narrower controllable expense definitions explicitly excluding insurance, utilities, taxes, and security costs; negotiate expense caps that reset based on objective market indices; or include catch-all language that allows any costs reasonably beyond a landlord’s control to be passed through.

Force Majeure Provisions

The pandemic exposed how devastating overly expansive force majeure provisions can become. Some leases granted tenants rent abatement rights for force majeure events without corresponding limitations. When COVID-19 struck, certain tenants claimed months of rent-free occupancy while landlords still faced mortgage payments, insurance premiums, and maintenance costs.

What to do: Carefully calibrate force majeure clauses. They may excuse performance delays but should rarely trigger automatic rent abatement — particularly when the tenant retains beneficial use of the space. Rent abatement for force majeure events is not market standard, but if rent abatement is included, it should be limited to periods when the premises are actually unusable, with strict notice requirements and outside date limitations.

Excluded Expenses

Excluded expense definitions can prevent landlords from recovering legitimate operating costs and become costly. When lease language bars pass-through of property management fees — often a meaningful percentage of gross revenues — landlords face an impossible choice: Absorb these costs directly or reduce service quality by eliminating professional management. Property management isn’t an optional luxury; it’s essential infrastructure that maintains asset value and tenant satisfaction. Excluding these fees from operating expense recovery creates a structural deficit that compounds annually.

What to do: Landlords should ensure management fees, leasing commissions (amortized over lease terms), and other necessary professional services remain recoverable expenses.

The Service Interruption Time Trap

Service interruption provisions requiring rent abatement if utilities or services aren’t restored within very short timeframes — sometimes as brief as a few days — can create problems. When a transformer failure, elevator maintenance, water main break, or HVAC system collapse occurs, repairs often require permitting, parts procurement, and contractor scheduling that simply cannot be compressed into such narrow windows.

What to do: Reasonable service interruption clauses should provide adequate time before abatement obligations trigger, with extensions for force majeure events. They should also exclude interruptions caused by tenant actions and limit abatement to the proportionate rent for actually unusable space.

Exclusive Use Violations: Paying for Another Tenant’s Breach

Perhaps most frustrating are provisions granting rent abatement when another tenant violates an exclusive-use clause. Your successful tenant in Suite 200 negotiated exclusivity for women’s athletic apparel. When the Suite 400 tenant pivots their boutique to include yoga pants, Suite 200 demands rent abatement — even though you’re actively pursuing enforcement. This provision makes one tenant’s economic performance dependent on another tenant’s compliance, creating an unmanageable risk matrix.

What to do: Landlords should limit remedies to injunctive relief and documented damages, not automatic rent abatement that begins before breach investigation is complete.

Defang Vampire Clauses

The most dangerous aspect of vampire clauses is their compounding effect. Individually, each provision might seem like a reasonable tenant concession. Collectively, they can substantially erode a property’s net operating income, destroying value and limiting refinancing options. Before these bloodthirsty provisions drain your portfolio dry, expose them to the sunlight: Conduct a comprehensive lease audit, engage experienced real estate counsel, and implement standardized fallback provisions in your lease templates.

Questions about unfavorable provisions in your commercial lease? Reach out to Daniel Crowley or another member of LP’s Real Estate Group.