What This Clause Means
Your landlord isn't just your landlord. In some commercial buildings, they're also your utility company — buying electricity wholesale and reselling it to you at a markup, sometimes 15–30% above actual cost. Utilities markup clauses are legal in most states and enormously profitable for landlords who use them.
Some Landlords Resell Utilities to Tenants at a Markup Above Actual Cost
In multi-tenant commercial buildings, some landlords purchase bulk electricity or gas for the entire building and then resell it to individual tenants based on their sub-metered usage. This is legal in most states and allows the landlord to charge a 'service fee' or administrative markup above the actual per-unit cost they paid the utility company. Markups of 10–20% above actual utility rates are common; some landlords charge 25–30%. For a tenant whose electric bill would be $2,000/month at direct utility rates, a 20% markup means paying $2,400/month — $4,800/year in additional cost that flows directly to the landlord as additional income.
Utilities Markup Is Often Disclosed Only in Lease Exhibit Language
Utilities markup provisions are rarely prominently disclosed. They often appear in exhibits defining how utilities are calculated, in a 'building services' exhibit, or in a separate addendum to the main lease body. Tenants who focus on the main lease body may miss the provision entirely. Look specifically for: 'Tenant shall pay for electricity at Landlord's applicable rates, which may include a service and administrative charge'; 'Landlord may charge a gross-up factor to account for master metering and redistribution costs'; or 'Tenant's utility costs shall include a 12% administrative fee.' These phrases mean you're paying more than what the utility company actually charges.
Sub-Metering Versus Direct Metering Changes Your Options
If your building uses sub-metering (the landlord has a master meter and installs sub-meters for each tenant), you're dependent on the landlord's billing and vulnerable to their markup. If your suite has direct utility metering from the local utility company, you pay the utility company directly at published rates with no landlord markup possible. Direct metering is better for tenants — you pay utility rates, you have an established process to dispute bills with the utility company, and the landlord has no financial incentive to inflate your utility charges. When negotiating a new lease, ask whether direct utility metering is possible for your suite, even if the building currently uses sub-metering.
How to Negotiate Utilities Markup Provisions
Three approaches: First, push for direct utility metering — you pay the utility company directly, no landlord involvement. This eliminates markup entirely. Second, if sub-metering is unavoidable, cap the landlord's markup explicitly in the lease: 'Tenant shall pay for electricity at the lesser of (a) the landlord's actual cost per kWh plus 5%, or (b) the local utility's published residential rate per kWh.' Third, if markup exists, require the landlord to provide annual utility cost statements showing actual cost versus amount charged, with the right to audit sub-metering calculations. This creates accountability for the markup amount.
State Laws on Utility Resale Vary Significantly
State utility commissions regulate utility resale differently. Some states require landlords who resell electricity to be licensed as retail electric providers, limit markup to a specified percentage, or require disclosure of markup rates in tenant agreements. Other states impose minimal requirements. California and New York have relatively robust regulations on sub-metering and utility resale. Texas, Florida, and many other states have minimal requirements. Check your state's utility commission rules — in regulated states, markups above specified levels may violate state law and give you grounds to challenge the charges or rescind the utility arrangement.
Include Utility Costs in Your Total Occupancy Cost Analysis
Before signing any commercial lease, estimate your monthly utility usage and confirm how utilities are billed. Ask the landlord or their broker for typical utility costs for similar-sized suites in the building. If the building uses sub-metering with a markup, apply the markup percentage to the comparable utility estimates. Include utility costs in your total occupancy cost analysis alongside rent and CAM charges. A lease with favorable base rent but 25% utility markup may have higher total occupancy cost than a higher-rent building with direct metering. The comparison requires knowing your utility costs under both scenarios.
What to Watch Out For
- Negotiate direct metering so you pay utilities directly to the utility company
- If submetered, require landlord to pass through at actual cost with no markup
- Request right to review landlord's utility invoices
- Cap any permitted markup at 5% maximum, not 10–15%
- Include utilities in CAM at cost, subject to audit rights
How to Negotiate This Clause
Push for direct utility metering from the utility company rather than sub-metering. If sub-metering is unavoidable, cap the markup at 5% above actual landlord cost; require annual utility cost disclosure with audit rights; and specify that markup is exclusive of all other charges (landlord can't add an administrative fee on top of the cap).
- Negotiate direct metering so you pay utilities directly to the utility company
- If submetered, require landlord to pass through at actual cost with no markup
- Request right to review landlord's utility invoices
- Cap any permitted markup at 5% maximum, not 10–15%
- Include utilities in CAM at cost, subject to audit rights
Example Language: Bad vs. Better
Landlord-Friendly (Risky)
"Landlord shall provide electricity and other utilities at rates established by Landlord from time to time, which shall not exceed 115% of the prevailing commercial utility rates in the market area."
Tenant-Friendly (Better)
"Landlord shall pass through utility costs at actual cost with no markup. Tenant shall have the right to review Landlord's utility invoices annually to verify costs. Alternatively, Landlord shall permit Tenant to establish direct utility accounts at Tenant's option."
Frequently Asked Questions
- Can my landlord charge more than actual utility costs?
- Yes, if the lease permits it. Landlords in master-metered buildings often add administrative markups of 10–15% to utility costs. Always check whether utilities are passed through at actual cost or at marked-up rates.
- What is submetering?
- Submetering means the landlord installs meters to track each tenant's individual utility consumption. Tenants pay based on actual usage. Without submetering, tenants may pay a pro-rata share of building-wide utility costs, which can be less accurate and more expensive.
- How do I find out if I'm paying a utilities markup?
- Request the landlord's actual utility invoices and compare to what you're being charged. If there's no audit right in your lease, request one. Direct utility connections eliminate the markup entirely.
- What are direct utility accounts?
- Direct accounts mean you have a contract with the utility company in your name for your specific meter. You pay the utility company directly at actual rates with no landlord markup. This is the most transparent and typically least expensive option.
- Are utilities markups disclosed in the lease?
- Not always clearly. Review utility sections carefully. Language like 'Landlord's then-current rates' or 'at rates established by Landlord' signals a markup. 'At actual cost' or 'pass-through basis' is the better tenant-friendly language.