This January, Nadav Ravid was asked to serve as a mediator to resolve a Common Area Maintenance, or CAM, dispute between a Real Estate Investment Trust landlord and an international retail tenant. These sophisticated parties were well-represented by seasoned litigators, and after a long day of shuttle negotiations, the parties ultimately settled their claims. Although the parties walked away satisfied with their settlement, each side spent considerable time and incurred significant fees to resolve their dispute.
To avoid such costly disputes, here are five helpful tips for landlords and tenants:
One of the best ways to avoid CAM disputes is to fix the CAMs at a set number with a fixed annual percentage increase while carving out uncontrollable CAMs such as taxes and utilities. This is different than providing a “not to exceed” CAM number, which still requires careful calculations. One of the advantages of fixing CAMs is the avoidance of accounting mistakes, as even the best-intentioned landlords are prone to human error. In large shopping centers, especially where many leases have different CAM exclusions, it is difficult to accurately and consistently account for all CAMs. By fixing CAMs, landlords and tenants can avoid the risk of making accounting mistakes and each side can be more confident in the accurate calculation of CAMs.
Contingency Fee Auditors.
Nothing riles a landlord more than having to open up its books to an auditor that is paid on a contingency fee basis. Not surprisingly, landlords question the motivation of such an auditor and whether the auditor’s objections are legitimate discoveries or just creative arguments to increase his or her fees. To avoid this, landlords often prohibit the hiring of a contingency fee auditor.
Regardless of how an auditor is paid, tenants may request that the landlord reimburse the tenant for its audit fees in the event the auditor discovers an overcharge. It is common for leases to provide that if an auditor discovers an overcharge that is greater than five percent (a relatively low hurdle), the landlord is responsible for the auditor’s fees in addition to refunding the tenant’s overpayment.
Careful landlords try to come up with a consistent list of CAM exclusions to avoid having to change the accounting on a lease-by-lease basis.
Time Limit for Audit Rights.
To avoid getting sued for multiple years of overcharges, landlords may require that a tenant audit the landlord’s books and records within a short time after tenant’s receipt of the annual reconciliation statement. Otherwise, the tenant’s audit right is waived. In response, tenants often seek to extend the time limit as much as possible.
By following the tips outlined above, landlords and tenants can reduce their risk over CAM dispute.
To learn more about lease audits and other lease issues, sign up for Nadav’s UCLA course on negotiating leases, which includes a guest lecture by Joshua W. Leonard, a Partner at Deloitte Financial Advisory Services, LLP, one of the nation’s leading experts on lease audits.