Commercial leases can be complicated and filled with terms both the landlord and tenant do not fully understand. A recent unpublished opinion in the California Court of Appeal exemplifies how a little confusion over the terms of a commercial lease can lead to over payments and litigation over the terms of the commercial lease. Fresh & Easy Neigborhood Market, Inc. v. WCPP-CT, LLC demonstrates how important it is to review a commercial lease and ensure you understand its terms at the onset of the lease term.
In 2006, Fresh & Easy Neighborhood Market (“Tenant”) contacted WCPP-CT, LLC (“Landlord”) to lease a space in the Landlord’s shopping center. The Landlord filled out a broker’s questionnaire stating that the Tenant would be responsible for common area maintenance charges (“CAM”) and estimated that the CAM would be $3.72 a square foot for the first year of the commercial lease. The Landlord did not provide a break down of the CAM charges. The Landlord was not represented by an attorney while the Tenant was represented by a law firm.
The first draft of the Commercial Lease provided that the CAM would be $3.72 a square foot for the first year and could be adjusted in subsequent years. The Commercial Lease also provided that the CAM would not include administrative, management, accounting, data processing, custodial, general overhead or similar charges. Upon the Landlord’s request, “administrative, management” was deleted in one paragraph of the Commercial Lease from what could not be included as part of the CAM charges; however, there was no further discussion after the Tenant provided a mark up with the changes made.
In 2007, after the Landlord’s property manager provided a statement of the CAM charges, the Tenant had several questions regarding the high management fee charged. The management fee was based upon gross rental income, and the Landlord explained that the shopping center was fully occupied and larger than average shopping centers where the Tenant had other locations. Further, the Tenant questioned a charge for “LA Co Flood Control” alleging that it was a capital improvement, which was prohibited to be part of the CAM charge.
In 2008, the Tenant again questioned the management fee and asked for additional documentation. The tenant further stated to strike any charges for management fees because they were not allowed under the Commercial Lease. It was discovered that the Commercial Lease still prohibited management and administrative fees from being included as a CAM charge even though the Landlord thought it had been removed.
In 2010, the Tenant filed a declaratory action seeking a declaration that the administrative and management charge is not a proper CAM charge; the Tenant is entitled to be reimbursed all amounts it has paid for administrative and management charges; and the Tenant has no obligation to pay administrative and management charges for the remainder of the lease term and any subsequent renewals.
During the trial, most witnesses found that management fees included costs associated with managing the entire shopping center, including evictions, advertising for vacancies, negotiating leases, and collecting rents. Administrative fees would include maintenance of common areas. It was also found that the method to determine CAM charges are generally negotiated between the parties. It was also discovered that there was another section that prohibited charges for maintenance and administrative fees that was not deleted by the Landlord, so the Tenant’s attorney thought the original deletion was only to remove redundant language.
The trial court agreed with the Tenant finding that administrative and management fees could not be included as part of CAM charges. The trial court’s decision was upheld.
Although this case cannot be cited, it is a good example of knowing what is in a commercial lease and to discuss all changes to a lease agreement during the negotiation process. Here, the Landlord and Tenant did not discuss why the Landlord wanted to remove the language prohibiting administrative and management fees from the CAM charges in one section while keeping it in another section.