What Is a Gross-Up Clause in a Commercial Lease?

Commercial leases often run for five, ten, or fifteen years. Over that span, building occupancy fluctuates. A new building might spend its first two years at 60% occupancy while the landlord fills remaining suites. Without a gross-up clause, the tenants already in the building absorb inflated per-unit costs for services that scale with occupancy: cleaning a building that is half empty still costs money, just less money. The gross-up clause corrects for that.

Both sides need to understand it. Landlords who apply it incorrectly face audit exposure. Tenants who do not understand it may accept overbilling without recognizing the error.

Why Gross-Up Clauses Exist

Buildings with vacancy create a math problem. Operating expenses are split among tenants using a pro-rata share calculation based on leased square footage. When a large portion of the building sits empty, the denominator shrinks. Each occupied tenant's share of variable costs climbs, not because costs grew, but because fewer tenants divide them.

Consider a simple example. A building has $100,000 in annual janitorial costs at full occupancy. At 60% occupancy, the building still needs cleaning, but the cost drops to $60,000. If two tenants each occupy 30% of the building and the building is 60% occupied, each tenant's 50% pro-rata share of $60,000 is $30,000. That matches what they would owe at full occupancy. No problem yet.

The problem appears when fixed costs get mixed in, or when the calculation uses rentable square footage rather than occupied square footage as the denominator. The gross-up clause creates a standardized baseline, normalizing variable costs to what they would be at the target occupancy level. Parr Brown Gee and Loveless describe it as "a contractual right to adjust operating expenses that vary with occupancy." The purpose is equitable risk allocation, not a mechanism to generate additional landlord revenue.

Variable vs. Fixed: The Line That Determines Everything

The gross-up clause is only valid when limited to genuinely variable expenses. Applying it to fixed costs lets landlords recover more than 100% of actual costs, which Stross Law and other commercial real estate attorneys have identified as a fundamental misapplication of the provision.

Property taxes are assessed on the property, not on its occupancy rate. They stay constant whether the building is 40% occupied or 100% occupied. Grossing up property taxes does not normalize costs to a fair baseline -- it inflates them beyond what the landlord actually paid. The same logic applies to building insurance and any expense set by fixed contract regardless of how many tenants use the space.

Courts have interpreted gross-up clauses narrowly when disputes reach litigation. A clause that fails to distinguish variable from fixed costs, or that permits the landlord to gross up the entire expense pool, often does not survive challenge. Parr Brown notes that valid clauses are "strictly limited to variable costs" in their application.

How the Math Works

The gross-up formula is straightforward once you know which expenses belong in it.

Most leases set the trigger at occupancy below 95%. Some use 100%. When actual occupancy falls below that threshold, the landlord calculates a gross-up factor:

factor = target_occupancy / actual_occupancy
grossed_up_expense = variable_expense × factor

A building with $50,000 in annual janitorial costs at 60% occupancy, with a 100% target, produces:

factor = 100% / 60% = 1.667
$50,000 × 1.667 = $83,333

The $83,333 represents what janitorial would cost if the building were fully occupied and fully staffed for that load. Each tenant's pro-rata share is then calculated against that normalized figure rather than the artificially depressed actual cost.

One constraint is absolute: the factor must never produce a grossed-up expense that exceeds what the building would actually cost at 100% occupancy. When actual occupancy already meets or exceeds the target, the factor equals 1.0. No adjustment. A factor above 1.0 applied to a building already at or above target occupancy is a billing error. For a practical way to check your own numbers, see the CAM gross-up calculator.

The Base Year Gross-Up Problem

Modified gross leases introduce a second layer of complexity. In these structures, the tenant pays a base rent that includes operating expenses up to a defined level, the base year, and then pays only for increases above that baseline in subsequent years.

If the base year is not also grossed up, the baseline is artificially low. A landlord who sets a base year during a period of 70% occupancy is recording actual variable costs at 70% of their full-occupancy level. When the building reaches stabilization, the comparison year shows expenses at 95% or 100% occupancy. The tenant pays the difference between the artificially low base and the normalized current year, not because operating costs grew abnormally, but because the building filled up.

Bryckel.AI's analysis of CAM lease provisions identifies this as one of the more persistent "CAM landmines" in base-year structures. The fix is base-year normalization: gross up the base year expenses using the same methodology applied to current year expenses before establishing the baseline. Leases negotiated during vacancy-heavy periods, particularly those signed in 2020 and 2021, are the most likely to have this gap. For a broader look at how base year selection can distort reconciliation results over time, the 7 CAM reconciliation errors guide covers this pattern in detail.

What to Look for in Your Lease

Reviewing your gross-up clause before a dispute arises is much easier than reconstructing the analysis after one starts. Three questions focus the review.

For more on how gross-up interacts with other reconciliation mechanics, including CAM caps and pro-rata share calculations, see what is CAM reconciliation and the overview of BOMA 2024 measurement changes.