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. The telltale phrases: '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. Whether direct utility metering is possible for a given suite is a common question in new-lease negotiations, even where the building currently uses sub-metering.
How Utilities Markup Provisions Are Commonly Negotiated
Three common negotiated approaches: First, direct utility metering — the tenant pays the utility company directly, no landlord involvement. This eliminates markup entirely. Second, where sub-metering is unavoidable, an explicit cap on the landlord's markup 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, where markup exists, a requirement that the landlord 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. State utility commission rules are the reference point here — in regulated states, markups above specified levels may violate state law and give tenants grounds to challenge the charges or rescind the utility arrangement.
Utility Costs Belong in the Total Occupancy Cost Analysis
The common pre-signing exercise on any commercial lease: an estimate of monthly utility usage and confirmation of how utilities are billed. Landlords and their brokers can typically supply utility costs for similar-sized suites in the building. If the building uses sub-metering with a markup, the markup percentage applies to those comparable utility estimates. Utility costs then sit in the 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.
Common Red Flags
- Direct metering — utilities paid directly to the utility company — is the common negotiated fix
- Where submetered, better-drafted leases pass utilities through at actual cost with no markup
- The right to review the landlord's utility invoices is a common negotiated addition
- Negotiated leases cap any permitted markup at 5% maximum, not 10–15%
- Lower-risk leases include utilities in CAM at cost, subject to audit rights
How This Clause Is Commonly Negotiated
The common negotiated outcome is direct utility metering from the utility company rather than sub-metering. Where sub-metering is unavoidable, negotiated leases 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).
- Direct metering, with utilities paid directly to the utility company
- Where submetered, pass-through at actual cost with no markup
- A right to review the landlord's utility invoices
- Any permitted markup capped at 5% maximum, not 10–15%
- 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. The lease's utility language determines 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?
- The common route is a comparison of the landlord's actual utility invoices against the amounts charged — an audit right in the lease is what makes that comparison enforceable, and leases without one commonly gain it in negotiation. 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. The signal is in the utility sections: 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.