Be Wary of Improper Property Management Fees Disguised as CAM Charges
Commercial leases often require tenants in a multi-tenant development (such as a shopping center or office building) to pay “Common Area Maintenance” or “CAM” charges in addition to monthly rent. For example, the AIR form of commercial lease, which is commonly used in California and other states, provides that the landlord shall “manage” all “common areas” of the development – driveways, sidewalks, landscaped areas, parking lots and the like – and allows the landlord to pass through to each tenant a proportionate share of expenses actually incurred in managing those common areas.
These lease provisions often are misunderstood or taken for granted by landlords and tenants and, as a result, are frequently violated, knowingly or otherwise.
CAM charges generally include property management fees. In addition, most leases permit the landlord to estimate CAM charges and to force tenants to pay their share of those estimates on a monthly basis, but generally require the landlord to reconcile or justify to its tenant the actual CAM charges after the end of each year.
In the AIR commercial lease form, “common area maintenance expenses” are defined as “all costs relating to the ownership and operation of the Project” including the cost of property management services. Generally, the landlord is required each year to deliver to each tenant a “reasonably detailed statement” showing how the tenant’s share of CAM was calculated. If a tenant’s estimated payments exceeded its proportionate share, the landlord must either credit that over payment to future CAM charges or issue a refund.
Commercial landlords who also manage the project themselves often charge tenants, in addition to CAM expenses actually incurred, an arbitrary, “industry standard” percentage of rent as “a property management fee,” even though the lease does not expressly provide for that and no third-party management fees are actually paid or incurred by landlord. This practice may violate the lease and California law.
Sophisticated tenants require CAM charges to be “actually paid or incurred” or “expended” by the landlord in order to be reimbursable, and they are careful to prohibit landlords from passing their overhead on as disguised CAM charges. To guard against this practice, tenants should negotiate (and then review) their leases carefully, require landlords to deliver “reasonably detailed statements” of CAM charges as often as the lease requires, and they should scrutinize those statements to ensure that all charges are allowed by the lease.
As a landlord, it is important to ensure that your form of lease accurately describes all charges that will be imposed upon your tenants. It is important as well to understand restrictions on passing overhead expenses to tenants, and to tailor leases as may be needed to achieve the desired result.
If you need help with Commercial Leasing issues as a landlord or tenant, contact the professionals at Capobianco Law Offices for assistance.