Stale CAM Charges: Are You Protected?
Common Area Maintenance (CAM) provisions in retail leases enable landlords to maintain the common areas of a shopping center on behalf of the tenants and then divide and allocate the costs of such maintenance among the tenants and occupants of the shopping center. A well-drafted CAM provision will clarify the responsibilities of both the landlord and the tenant and eliminate unnecessary confusion during the term of the lease. A standard CAM provision may include the following language:
"…Tenant shall pay to Landlord, … on the first day of each calendar month … for each Calendar Year during the Term, …Tenant's Proportionate Share of Basic Costs …[which shall be defined as follows:] … before the beginning of each Calendar Year thereafter during the Term, Landlord shall furnish Tenant with Landlord's estimate of the Basic Costs for the applicable Calendar Year…. [Within 90 days after the end of each Calendar Year, the Landlord must furnish the Tenant with a statement of the actual Basic Costs for the prior Calendar Year.] Within thirty (30) days after the delivery of the Expense Statement, a lump sum payment will be made by Tenant equal to the amount, if any, by which Tenant's Proportionate Share of the actual Basic Costs exceeds the amount which Tenant has paid toward the estimated Basic Costs for such Calendar Year…. If Tenant's Proportionate Share of the actual Basic Costs is less than the amount Tenant has paid toward the estimated Basic Costs for such Calendar Year, Landlord shall refund the excess to Tenant within thirty (30) days after the issuance of the Expense Statement… If, instead Tenant's Proportionate Share of the Basic Costs for such Calendar Year is more than the amount Tenant has paid, Tenant shall pay the additional cost to Landlord within thirty (30) days after the issuance of the Expense Statement."
This provision is an example of one type of CAM provision; the provision provides for the tenant to pay an estimate of its pro rata share of the CAM costs at the start of each month, and then provides for reimbursement to the tenant, in the event that the estimates paid by tenant was an overpayment. If the tenant's estimated payments constitute an underpayment, the clause provides that the tenant must pay the additional cost to landlord.
An alternative to the foregoing payment structure has the landlord paying CAM charges as incurred and then billing the tenant for the reimbursement of the tenant's share of such costs after the annual costs have been determined. This type of payment structure is more typical for larger, anchor tenants.
Both types of CAM provisions are often written without including a clear schedule for reconciliation. Without a timetable for landlord reconciliation or tenant reimbursement incorporated into the CAM provision, a landlord and/or tenant may find themselves liable for large lump sums years after the costs were paid and/or accrued. Problems often arise in two areas relating to payment and reimbursement of CAM charges, the first where CAM clauses are miscalculated, and the second, where CAM charges are not assessed upon or billed to tenants in a timely manner. The first issue can be addressed by inserting audit provisions as part of the CAM provision. The second issue is more difficult to resolve. CAM charges that are not timely assessed or billed are often referred to as "Stale CAM Charges." It is more difficult for a tenant to pay a large lump sum than it is to pay small predictable amounts assessed over time. If a landlord waits too long to bill a tenant for reimbursement for CAM charges, a tenant may find itself liable for a large lump sum payment, which the tenant did not expect long after the costs were incurred. Similarly, if a landlord falls behind in its bookkeeping and fails to timely reconcile its books, it may find itself owing its tenants large reimbursements due to overpayments. The problem of delay in billing and/or accounting may be infrequent with large, institutional landlords; however, smaller landlords who have fewer administrative resources may experience such problems more often. All landlords may, however, experience loss of delayed billing costs, which need to be billed to a tenant past the date of the annual reconciliation. In such circumstances, a potential payor may successfully argue that the sums should no longer be owed based on the legal principals of waiver, equitable estoppel and the expiration of the statute of limitations. Whether a landlord and/or tenant has a cause of action if lump sum payments become necessary as a result of delay in billing is unresolved, although several courts have addressed the issue in terms of a "waiver theory," siding against the party who failed to act in a timely manner.
In the case of N.H. Waters, Jr., vs. Don Taylor, 527 So.2d. 139 (1988) the Alabama Supreme Court addressed this matter and ruled on the basis of a "waiver" concept that a landlord had no right to collect an accrued, but unpaid increase in rent . The Waters case involved a landlord who failed to demand increases in base rent (not CAM charges) due to it over a four year and nine-month period. The court found that, while the landlord was legally entitled to the rent increase under the lease, its course of conduct over the four year, nine-month period (billing the tenant for the lesser amount and accepting the lesser amount) was indicative of the landlord's waiver of the right to collect increased rent.
In 1999 the Alabama courts again addressed the waiver issue in GE Capital Information Technology Solutions v. Fred Nunnelley, 730 So.2d 23 (1999). The Court determined that it is an issue of fact whether a landlord waived its rights under a lease by accepting an underpayment of rent for 36 months, the case was remanded for trial to determine the waiver issue.
While the case law on the subject is limited, practitioners drafting lease provisions to address this issue, have made distinctions based on a contractual theory. Whether rent, CAM, or other charges are easily determined and set out in the lease document, the tenant has an expectation of what is owed and a contractual obligation to pay it, therefore the waiver theory or the theory of equitable estoppel or laches do not apply. However, if the determination of amounts due under a lease, either in terms of rent, CAM or other charges is wholly within the landlord's control, then the landlord has a fiduciary duty to accurately and timely notify the tenant of the amount(s) due. The tenant can rely on such notification as determining what is owed by it to the landlord. This rationale, however, has not been raised or asserted in any case law addressing this problem.
Delayed reimbursement of CAM and other charges, as outlined above, can lead to costly litigation and a deterioration in the relationship between the landlord and its tenants. These problems can be avoided by drafting CAM provisions that include a clear schedule of establishing timeframes for every step of the landlord reconciliation and tenant reimbursement process. Including such timeframes in the CAM provision will notify each party of its CAM charge reimbursement responsibilities, make it easy to identify who is in default should any problems develop, and prevent the parties from becoming entangled in the web of stale CAM provisions.