A gross-up provision is the office lease clause that decides whether a tenant pays its fair share of operating expenses or subsidizes the landlord's vacancy, and most tenants never check the math. It instructs the landlord to state variable operating expenses as if the building were fully occupied, then apply the tenant's proportionate share to that grossed-up figure. Get it right and it protects the tenant. Get it wrong, or leave it out, and a tenant who signed in a half-empty building can face escalation bills that have nothing to do with rising costs and everything to do with the building filling up. With national office vacancy near 18 to 20 percent entering 2026, per Cushman and Wakefield and CBRE, the number of leases signed in partly vacant buildings is large, and so is the exposure.
Key Takeaways
A gross-up provision restates variable operating expenses as if the building were fully occupied, so a base-year tenant is billed on a consistent basis as occupancy changes.
Without a gross-up, a lease signed in a low-occupancy building sets an artificially low base year, and the tenant absorbs expense increases driven by the building filling up rather than by cost inflation.
Only occupancy-variable costs should be grossed up, including janitorial, utilities, trash, and management fees; fixed costs like taxes, insurance, and security should not, per Holland and Hart.
Gross-up clauses typically apply an assumed occupancy of 95 to 100 percent, and the assumed percentage is the single most negotiated number in the provision.
With national office vacancy near 18 to 20 percent per Cushman and Wakefield and CBRE, base-year gross-up exposure is widespread, and the fix is a symmetrical clause plus an audit right.
What Is a Gross-Up Provision and Why Does the Base Year Matter?
A gross-up provision is a lease mechanism that requires the landlord to calculate variable operating expenses as if the building were fully occupied, regardless of actual occupancy. It matters most in a base-year lease, where the tenant pays its share only of expenses that exceed a fixed base year amount. The base year sets the baseline, so how it is measured drives every escalation that follows.
The mechanics are simple once the baseline is clear. In a base-year structure the landlord passes through the tenant's proportionate share of operating expenses above the base-year amount. If the base year is measured while the building sits half empty, the base-year figure for occupancy-sensitive costs, janitorial, utilities, trash removal, is artificially low. As the building leases up, those costs rise for a reason that has nothing to do with the tenant: more occupants. Without a gross-up, the tenant is billed for that increase as if it were cost inflation.
The gross-up cures this by putting the base year and every comparison year on the same footing: full occupancy. AQUILA and Parr Brown both make the point that a gross-up protects the tenant from large, occupancy-driven reconciliation bills, not just the landlord from vacancy. The clause is neutral technology. Its fairness depends entirely on whether it is applied consistently to the base year and to later years, and on which expenses it touches.
How the Missing or One-Sided Gross-Up Overcharges a Tenant
A missing or one-sided gross-up overcharges a tenant by understating the base year and then billing the tenant for the building filling up. The damage compounds because the base year is fixed for the life of the lease. Every future escalation is measured against a baseline that was too low from day one, so the overcharge repeats every year the building is more occupied than it was in the base year.
Work the example. A tenant leases 10 percent of a building. Grossed-up variable expenses at full occupancy are $1,000,000. In the base year the building is 50 percent occupied, so actual variable expenses are $500,000. In year two the building is 95 percent occupied, so actual variable expenses are $950,000. The tenant's share is 10 percent.
Scenario | Base year expenses | Year 2 expenses | Tenant share of increase (10%) |
No gross-up (base at actual 50%) | $500,000 | $950,000 | $45,000 |
Gross-up applied both years (to 100%) | $1,000,000 | $1,000,000 | $0 |
The gap is the overcharge. Without a gross-up, the tenant pays 10 percent of a $450,000 increase, or $45,000, in year two alone, even though per-occupant costs never rose. With a symmetrical gross-up, the base year and year two are both stated at full occupancy, the comparison is apples to apples, and the occupancy-driven increase disappears. The costs derived here follow directly from the stated inputs; the point is structural, not the specific dollar figure.
The one-sided version is subtler and worse. A landlord who grosses up later years but not the base year manufactures a permanent gap. Herrick and the Holland and Hart memo both flag this: the tenant must insist the gross-up apply to the base year on the same terms as every comparison year, or the clause protects only the landlord.
Which Expenses Should Be Grossed Up, and to What Occupancy?
Only expenses that vary with occupancy should be grossed up, and typically to an assumed occupancy of 95 to 100 percent. Grossing up a fixed cost is not a correction; it inflates the tenant's bill for a cost that would not have changed with occupancy at all. The line between variable and fixed is the line between a fair clause and an abusive one.
Holland and Hart, Lowndes, and Parr Brown converge on the same split. Occupancy-variable costs that should be grossed up include janitorial, utilities and electricity where separately billed, trash removal, and management fees tied to collections. Fixed costs that should not be grossed up include real estate taxes, building insurance, and security, because these do not rise when a vacant floor fills.
Cost | Varies with occupancy? | Gross up? |
Janitorial | Yes | Yes |
Utilities / electricity | Yes | Yes |
Trash removal | Yes | Yes |
Management fees | Often | Often |
Real estate taxes | No | No |
Insurance | No | No |
Security | No | No |
The assumed occupancy is the number to fight over. A gross-up to 100 percent maximizes the base year, which favors the tenant, while a gross-up to 95 percent is common and defensible. Gross-up clauses typically kick in when average occupancy falls below 95 to 100 percent, per AQUILA. The tenant's protection is twofold: cap the gross-up to occupancy-variable costs only, and pair it with an audit right so the tenant can verify the landlord did not gross up above what it actually paid.
A gross-up clause is only as honest as the base year it is applied to. Gross up the comparison years but not the base year, and you have not corrected for vacancy, you have built a permanent surcharge.
Frequently Asked Questions
What is a gross-up provision in an office lease? A gross-up provision requires the landlord to calculate variable operating expenses as if the building were fully occupied, regardless of actual occupancy. In a base-year lease it keeps the base year and later years on the same footing, so the tenant is not billed for expense increases caused by the building filling up.
Does a gross-up provision help the tenant or the landlord? A gross-up provision can help both, depending on how it is drafted. Applied symmetrically to the base year and comparison years, it protects the tenant from occupancy-driven escalations. Applied only to later years, or extended to fixed costs like taxes and insurance, it favors the landlord and overcharges the tenant.
Which operating expenses should not be grossed up? Fixed costs that do not change with occupancy should not be grossed up, including real estate taxes, building insurance, and security. Only occupancy-variable costs such as janitorial, utilities, trash removal, and management fees are properly subject to a gross-up, per Holland and Hart.
Conclusion
A gross-up provision is treated as accounting boilerplate. It is not. It is the clause that determines whether a base-year office tenant pays for cost inflation or for the landlord's lease-up, and the difference runs to real money every year the building is more occupied than it was when the base year was set. The math is not hard. It is simply rarely checked, because it sits in the operating-expense section that tenants skim and landlords draft.
The discipline is threefold. Insist the gross-up apply to the base year on the same terms as every comparison year, so the baseline is not artificially low. Limit the gross-up to occupancy-variable costs and keep taxes, insurance, and security out of it. And pair the clause with an audit right so the assumed occupancy and the grossed-up totals can be verified against what the landlord actually spent. In a market where a large share of leases are signed in partly vacant buildings, that check is not a nicety. It is the difference between paying a fair share and subsidizing a landlord's empty floors.