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SHOPPING CENTER COMMON AREA MAINTENANCE
This LARG focuses upon the Common Area Maintenance (CAM) clause in the shopping center lease. The first section looks at a number of tenant-oriented issues that can have a dramatic impact upon the actual amount of CAM charges that the shopping center tenant pays under its lease. The second section covers the landlord's obligations to maintain the common areas--an area in the lease that is often overlooked by the tenant to its regret. Finally, the Lease Clause Critique analyzes a pro-landlord CAM clause from a regional shopping center lease containing numerous sections with comment.
A Thoughtful Tenant's Approach to the Retail CAM Clause
Pro-landlord office leases and pro-landlord shopping center leases are very similar in approach when specifying the costs that the tenant must reimburse to the landlord for maintaining common areas. In both types of leases, the landlord attempts to characterize nearly every conceivable expenditure for the common areas as one that qualifies for pro-rata reimbursement by the tenant. As a result, the retail tenant often tries to exclude many of the same items from the list of reimbursable CAM charges that his office cousin tries to exclude from its office building lease operating expense clause.
Customary Pro-Tenant CAM Exclusions
Examples of CAM exclusions frequently proposed by shopping center tenants include:
- Capital costs for the center or its common areas;
- Acquisition costs of land and buildings for the center or its common areas;
- Depreciation of buildings;
- Repairs to rentable space; and
- Legal or management expense associated with negotiating new leases or enforcing old ones.
Sensitive CAM Issues for the Tenant
But apart from CAM exclusions, there are a number of other issues that should be carefully considered by the tenant because of their potential effect upon CAM calculations. They include:
- CAM Subsidies for the Majors and Theaters. Many pro-landlord shopping center leases provide that any contribution to CAM costs from major tenants in the center will merely be deducted from overall CAM costs, and that the balance of such costs will be paid by all other tenants on a pro-rata basis (excluding the space occupied by such major tenants). This preferential CAM treatment is also sometimes accorded to movie theaters. "Major tenants" may be defined by referring to the amount of square footage occupied by such tenants (e.g., "tenants that occupy more than 20,000 square feet of leasable space"), or by identifying the space occupied by such tenants on the plot plan for the center. This practice of excluding such contributions from the majors acknowledges a simple fact of retail life—major retail tenants have so much leverage that they do not pay the same CAM charges as everyone else. Of course, the exclusion approach also means that the smaller tenants of the center in fact subsidize the majors as far as CAM is concerned.
- Administrative Surcharges. It has become common for shopping center landlords to add a surcharge (e.g., 15% of all CAM costs) to the costs reimbursed by the tenant on a pro-rata basis. In theory, this surcharge is to compensate the landlord for the administration or management of the common areas. Tenants often negotiate to (a) reduce the percentage, (b) exclude real estate taxes and insurance from the base against which the percentage is applied, on the theory that such items require no appreciable management effort on the part of the landlord, and/or (c) delete the salaries and benefits of the landlord's management personnel from CAM costs, if the administrative percentage must stay in the deal, so as not be charged twice for the same "administration."
- Spread Out Big Ticket CAM Costs. Tenants often try to negotiate language requiring that roof replacements and parking lot repaving or replacements not be included as a lump sum in CAM costs in the year incurred, but rather be spread out over a period of time (e.g., five years) to ease the financial impact of the item. Roof replacements can be particularly expensive since many definitions of common areas include the roof area over space occupied by individual tenants as well as the roof area over the common areas.
- First Year Landlord CAM Cost Estimate. Many tenants try to get the landlord to include an estimate of the dollar amount of the tenant's share of CAM costs for the first year of the term. Landlords are loathe to provide such estimates, since if the tenant's CAM costs come in much higher than the estimate, it looks like the tenant has been mislead.
- Interior versus Exterior CAM Charges. If the shopping center tenant is freestanding, it may not want to pay CAM expenses for enclosed mall maintenance and operation. CAM costs (particularly HVAC costs) for enclosed common areas, especially when they are located in areas with hot summers and cold winters, can be very expensive. This fact has prompted many freestanding tenants (e.g., fast food pad tenants, banks, etc.) to balk at paying enclosed mall CAM charges. Depending upon the precise type of business deal negotiated by the pad tenant, such tenants may be more amenable to payment of so-called "exterior CAM" charges.
- Tenant Audit Rights. Increasingly, retail tenants are auditing their landlords for CAM charges. This does at least three things for the tenant. It gives the tenant an inside view of the landlord's CAM administration practices, and can flush out accounting practices that do not comply with the lease's CAM provisions. It also gives the aggressive tenant the chance to recover amounts previously paid to the landlord which were inconsistent with the letter of the lease. Finally, a rigorous audit is likely to make the landlord much more careful in the future administration of and accounting for CAM functions.
- Increased Landlord Documentation for CAM Charges. Anchor tenants often require supporting documentation (i.e., copies of the actual invoices and pro-rata share calculations) for certain large expenditures before paying their share. This is particularly true for insurance payments (and for real estate tax payments if they are included as a CAM cost as opposed to being located in a separate section of the lease), since they often are a large component of the CAM budget.
- A Shortened "Statute of Limitations" for CAM Costs. Well represented retailers often negotiate for a cut-off date after which they can not be liable for unbilled CAM charges for prior lease years. This protects tenants from exposure to "restated" CAM charges for prior lease years, which often materialize following the sale of the shopping center or after a change of the property management firm for the center. Such a contractual cut-off shortens the actual statute of limitations for written contracts, which can be longer (e.g., seven years) than many tenants realize.
- Kiosks and Carts in the Common Areas. Shopping center landlords are always looking for ways to increase revenues. One way that is becoming more popular is to put kiosks in the common area with additional retailers. Another is to allow seasonal merchants to roam the common areas with carts of merchandise (e.g., with Christmas ornaments and gifts during the holidays). If these merchants are operating in the common areas, should the space they occupy really be included as common area in CAM calculations?
- Are CAM Charges Strictly Tied to the Common Areas? If the expense reimbursements by the tenant are for the articulated purpose of maintaining the common areas of the center, then the definitional language for such costs should require reimbursement only of costs incurred in the management and operation of the center's common areas, rather than of costs incurred for the management and operation of the shopping center. A tenant might reasonably argue, "If the costs to be reimbursed by the tenant include costs that are not expressly related to the common areas, then they're really not CAM costs, are they?"
- Generally Accepted Accounting Principles. The tenant should insist that CAM costs be computed in accordance with GAAP, to prevent any unorthodox accounting or allocation methodology by the landlord or its management company with respect to CAM charges. This can be particularly important in accounting treatment and pass through decisions concerning depreciation of equipment, capital reserves, and the like.
Spelling Out the Retail Landlord's CAM Obligations
Pro-landlord regional shopping center leases almost always contain numerous and lengthy clauses dealing with retail common areas (see this month's Lease Clause Critique for an example). Among other things, in page after page of prolix CAM prose, the shopping center landlord seeks to:
- Regulate and control the use of the common areas;
- Define the CAM costs that must be reimbursed by the tenant. The language specifying the CAM costs to be reimbursed by the tenant is normally broadly drafted and cites examples ad nauseum. Of course, the laundry list of CAM costs that must be reimbursed by the tenant is merely for illustrative purposes—normally any cost incurred or expended by the landlord in connection with the operation, maintenance, management and repair of the center's common areas qualifies for reimbursement by the tenant on a pro-rata basis; and
- Specify precisely how such CAM costs will be reimbursed by the tenant on a pro-rata basis.
Given the considerable bulk of the common area provisions (in particular the broad brush definition of the CAM costs to be reimbursed by the tenant), the shopping center landlord will usually make room to itemize its actual CAM obligations, right?
Not likely. The normal pro-landlord shopping center lease form deals with the landlord's obligations to maintain the common areas in one of two ways:
- The lease is completely silent on the matter; or
- The landlord agrees to maintain the common areas in a manner totally within the landlord's sole discretion.
Frequently, tenants become so engrossed in the definition of CAM costs and the exclusions to those costs, that they miss the fact that the lease is silent (or almost silent) with regard to the landlord's precise maintenance duties for the common areas. Just because the landlord has the right to be reimbursed for any CAM expense doesn't mean that the landlord will actually maintain any of the center's common areas, or maintain them very well. One might ask, isn't it in the landlord's best interest to maintain the shopping center's common areas, especially when he's is reimbursed for the costs of doing so? Normally, yes. But that can change. The landlord can hire its brother to manage the center. The landlord can get into a dispute with one of the main tenants in the center, and refuse to maintain the center's common areas out of spite. The landlord can go chapter, and the center can be taken over by the lender who can't manage even its own affairs.
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