by Jim Smith | Shareholder, Environmental
Most commercial leases require the landlord to maintain the common areas of the shopping center or building in which the tenant’s business is located. Common areas are sidewalks, driveways, parking areas, service areas, landscaping and other areas and facilities designed for the common and joint use and benefit of all occupants and tenants in the shopping center or building. The operating expenses incurred by the landlord to maintain these common areas (or common area maintenance charges) are passed through to the tenant in a net lease by requiring the tenant to contribute its proportionate share of such operating expenses or common area maintenance charges.
These common area maintenance charges lead to significant expense and are often the cause of much dispute between landlords and tenants. Landlords wish to provide for a broad, extensive list of the types of operating expenses to be included in the common area maintenance charges, which may include the operation, repair, replacement, maintenance, protection and painting of the common areas and entire shopping center or building. Tenants wish to restrict operating expenses to maintenance and repairs, excluding large replacement items, for solely common areas, not the entire shopping center or building. Tenants wish to provide an extensive list of types of operating expenses to be excluded from common area maintenance charges.
Capital expenditures, management fees, administrative fees, roof repairs, restriping, repaving and other types of operating expenses are heavily negotiated. Management fees and administrative fees should be clearly defined to avoid costly disputes. It is also critical to both landlords and tenants to clearly state the calculation of the tenant’s proportionate share.
Tenants wish to apply a cap on certain common area maintenance charges, which may be in the form of a fixed number or a percentage of increase per year. Landlords wish to limit such caps to controllable expenses comprising of costs and charges that are within the reasonable control of the landlord. Controllable and uncontrollable expenses are also heavily negotiated and should be clearly defined.
Tenants wish to have a right to audit and inspect the landlord’s records relating to the common area maintenance charges to determine if such charges are allowable, reasonable and necessary under the lease terms. Landlords wish to limit the audit rights by (i) restricting any audit to no more than once per year and only for the year in question (not previous or multiple years), (ii) not allowing any audit by a firm retained on a “contingency fee” basis which is dependent on a refund received by the tenant, (iii) limiting the time, place and duration to conduct and complete the audit, and (iv) providing other constraints including confidentiality requirements, rights to dispute the audit, conditions that the tenant cannot be in default of the lease to exercise the audit right and a waiver of the right to audit or dispute charges that were not timely exercised.
Common area maintenance disputes can be eliminated or greatly reduced by drafting thorough definitions and language in the lease that clearly delineates the operating expenses to be included and excluded in common area maintenance charges. A carefully drafted lease that sets forth the defined terms upon which a landlord and tenant negotiate and come to an agreement will minimize disputes in the future resulting from a clear understanding of each party’s obligations under the lease.