7NOX Blog

Including AHAC Charges in Your Commercial Lease

paper on desk that says lease agreement

Written by 7NOX Team

July 22, 2021

If you’re new to after-hours air conditioning (AHAC), you may find it hard getting started drafting a lease or tenancy notice. AHAC is a complex topic, and each property requires a bespoke solution. However, there are a few basic terms and ideas that appear in most agreements regardless of your circumstance or location. While you should always consult a legal professional when drafting leases, the following tips and topics will help get the ball rolling.

Define “AHAC”

To start, make sure you have a clear and unambiguous definition of after-hours AC. Ensuring accuracy and clarity in your leases not only covers you legally, it helps improve tenant satisfaction. Use a term that’s common for your area. In some markets, after-hours service is referred to as “after-hours HVAC” or “overtime HVAC.” Other times a lease may only refer to it as “after-hours air con” or “AHAC” for short. With a little research, you can locate the preferred name for your situation. But regardless of the moniker used, be consistent to avoid confusing your tenants.

Next, your definition needs to set parameters for when AHAC applies. In most situations, it refers to charges incurred by any tenant who operates the air conditioning system outside of normal operating hours. Therefore, your definition must necessarily include an explanation of “normal” operating hours.  

List Normal Hours of Operation

the core operating hours for a property are usually stated within the lease, but it’s a good practice to remind tenants in all your communications. Use a simple table like the following that clearly lists times and days for each floor, tenant and/or zone of the property. 

Level 2Mon-Fri 8:00 am — 6:00 pmSaturday8:00 am — 1:00 pm
Level 1Mon-Fri 8:00 am — 6:00 pmSaturday8:00 am — 1:00 pm
GroundMon-Fri 9:00 am — 5:00 pmSaturday9:00 am — 12:00 pm
Example of table listing core operating hours.

By definition, any HVAC usage outside of normal operating hours is considered AHAC and will be charged as such to the requesting tenant. In contrast, you could list a table showing only times that fall inside the AHAC time slots, if this makes it easier to understand. 

Remember to mention any specific days outside the scope of operating hours such as holidays. And if you don’t plan to make AHAC available to all parts of your property, then list those excluded areas in your lease and/or communications with tenants.

Explain Fixed Rate Calculation

Explain how you calculated the energy costs (i.e., fixed energy rate) that factored into your after-hours HVAC fee. If it was based on an average energy cost across the entire property for a specific time, then show how you prorated the amount. Maybe your energy provider calculated the hourly cost for you. If so, briefly explain how this process works. If you estimated the hourly energy based on the equipment involved, then list these HVAC assets for the tenant. Such assets might include chillers, AHUs, VAVs and FCUs. 

Yes, your tenants are likely to have little interest in how air handling units work. But they will appreciate that you’ve done your due diligence in calculating the actual energy expenses for which you’re charging them. Such reassurance is beneficial when billing issues surface.

Add Excluded Costs

You may also want to list any excluded HVAC equipment or service costs. These can include anything within your fixed energy rate calculation that you’ve chosen not to include even though it’s an actual operating expense. For example, your chiller uses water for heat rejection, but it may be impractical or impossible to get an accurate measurement. Therefore, you may end up omitting water usage from the fixed rate calculation. Other omitted costs often include electricity for lighting hallways, car parks and powering elevators. 

An excluded equipment and services list may seem like overkill, but it does show tenants you’ve chosen to absorb some of the costs. This can help quell future complaints about AHAC increases.  

woman using calculator to figure ahac lease costs

Show Tenants How to Calculate AHAC Charges 

Finally, write out the actual formula for calculating the AHAC monthly charge. Examples clear up the process for your tenants. At minimum, your AHAC charge will include the following elements:

  • Fixed Rate x Number of Operating Hours = AHAC Charges

At this point in the lease, record the amount of the AHAC hourly charge (e.g., “$75 per hour”) Examples here are helpful too: “Tenant A used 10 hours of after-hours HVAC for the month, their total charge would be $75 x 10 = $750.” 

Accelerated Depreciation

Including wear-and-tear of your HVAC equipment helps offset replacement costs for their shortened service life. If you include accelerated depreciation in your fixed energy rate or AHAC charges, add it to those sections as a line item or as part of the AHAC formula. There are many ways to recoup depreciation losses. Some property owners make depreciation a separate charge, adding the fees to a general “building fund” that goes to maintain the property as a whole. Whatever method you choose, justify your decision by pointing out that after-hours HVAC operation shortens the life-span of your equipment. You’ll need those funds for PPM and to ensure a comfortable building environment for tenants.  

Fixed Rate Adjustments

Electricity costs fluctuate, and so will your fixed energy rates. To stay profitable, many firms add a 12-month fixed rate agreement to their lease. The agreement stipulates that when the year ends, the fixed rate will be reviewed and adjusted according to current market rates. Including a section in your lease that explains your rate review strategy helps tenants avoid sticker shock. Email reminders at the beginning of the year also prepare tenants for rate increases. 

AHAC vs Annual Operating Expenses

Keep after-hours HVAC charges separate from your annual operating expenses. There’s the potential that AHAC kWhs are accidentally mixed with your normal end-of-year utilities bill to tenants. If this is the case, you will end up charging tenants twice for the same energy usage. 

Savvy tenants will anticipate this possibility of energy “double-dipping” and want reassurance from you. Prepare for these concerns by explaining that you’ve taken measures to ensure accuracy and fairness in your billing. It’s the most effective way to avoid confusion down the road.  

Conclusion

It’s clear there are many factors to consider when building an after-hours HVAC lease agreement. In the end, you can make a lease as simple or complex as you like. Your approach will ultimately be guided by how much time you want to spend vs how much energy costs you want to recoup. The more accurate your fixed rate calculation, the more research it will require. For some, the time spent figuring excluded costs may not offset the benefits of avoiding tenant complaints. But most managers will adopt an approach that prioritizes tenant satisfaction. Eating a bit of operating expenses is a small price to pay for full occupancy and happy tenants.

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