Expert: Jim Avancena, CPM - 12/26/2008

Question
I just ended my commercial lease in Michigan. I paid my CAM charges monthly on time for the duration of my lease. At the end, I was given a bill for "reconciliation" of CAM. During the lease, I paid the new (increased amount) every year without question. Do I now have to pay the $5,000.00 they say I owe? (Michigan Commercial)

Answer
Mike-

You won't know the answer to your questions until you determine the true and accurate derivation of the $5,000 charge.  The answer that follows is a bit complex.

Normally, a tenant pays twelve (12) estimated payments; one each month, over each lease year to his landlord based on what the landlord believes each tenant's pro-rata share of the total amount will be for Common Area Maintenance expenses during that 12 month period.   

For example, if your landlord believes that your pro-rata (or "ratable") share of the total CAM expense will be $600 after one year, he should ask you to pay him $50 per month for each of those 12 months so that at the end of your twelve (12) payments that year the landlord will have $500 that you have paid to apply to what he believed would be your ratable share of the total expenses. However, at the end of those 12 months, the landlord sometimes discovers that the total CAM expenses are more that the landlord estimated at the beginning of the year.   For instance, the snow removal contractor may have increased his charges for clearing the snow from the parking lot during the year, and now your pro rata share of the total CAM expenses is $560.   In this case, the landlord will send you a bill for $60 to reimburse him for the unexpected increase during the last twelve (12) months that caused the total CAM expenses to increase over what he anticipated at the beginning of the year.

My remarks herein assume that this "reconciliation of CAM" charge for $5,000 you have received from your landlord is the same type of additional payment that the landlord discovered you owe him because he had undercharged you during the previous year.   

You should send a formal letter (certified mail) to your landlord, its' property management company, or the landlord's accountant; that is, to who ever sent you the "reconciliation" invoice for the additional $5,000 payment (send a copy of the letter to your landlord).   Ask them to send you a "DETAILED MONTHLY ACCOUNTING IN ACCOUNT CODE ORDER FOR THE CAM FISCAL YEAR" (this describes how the information is normally maintained in the property managers computer records so it will be very little effort for the landlord to print it out and provide it to you) that will evidence how they derived the total of $5,000 additional CAM charge that they indicate you owe the landlord.   Note however, that if they send you simply a list of the charges that comprise the $5,000 additional reconciliation charge, it will mean nothing without the context of all the other combined CAM charges for the year to confirm the derivation of ALL of the aggregate annual CAM costs during the subject CAM expense year.

You, and a accountant or bookkeeper that you contract with for this review, will need to carefully review each of the many component expenditures for the entire year that when added together show the total annual (12 Month) CAM expense.   Then, calculate your pro-rata  share of that total annual CAM Expense figure.   Does your pro-rata share of that CAM total equal the amount you have paid your landlord over the last twelve (12) months plus the $5,000 additional payment?   It should if your landlord has charged you correctly for the last year of CAM expenses.   If your calculations don't come out to be the same amount that the landlord has asked you to pay for this last CAM year, ask the landlord, or his representative why the calculations come out to different amounts.

Additionally, if you don't know based on the individual charge what each expense is for, ask to see the actual "supporting documents" that explain what each of the expenses was for.   If, for example,  the charge is for a $340 check paid to the local District Court for a speeding violation by the property manager one Saturday night during the last year, or another payment for $500 to the local sheriff for his re-election campaign, you know that these kinds of expenses should not be included as reimbursable expense that the tenants have to reimburse.    Check the text of your lease for a clause in the Common Area Maintenance provision that describe or lists the specific types of expenses that can be included for reimbursement as CAM expense.     

It is best to have someone who is trained in related business specialties to assist you with verifying these annual charges because bookkeeping and accounting can easily be mis-understood by those of us without those special skills.   It would be very easy for someone to mislead a lay person about these matters by using a massive amount of technical jargon that non-accounting persons would not understand.  You should have an accountant, bookkeeper, or even better; a property manager, to assist you in this effort.   Discover if you might have a brother-in-law, cousin, ex-wife,friend, etc. who may be familiar in allied disciplines that could assist you with this effort.

Lastly, let me tell you of my concerns and some things to consider:

1.)  After over 25 years, I do not ever remember ever seeing a final "reconciliation" for CAM expense that came out to a peculiarly uncharacteristic, precise amount like $5,000.  The figure invites curiosity.  This could be a millennial coincidence, but I am extremely skeptical of a CAM bill in the amount of $5,000.

2.)  I am also uncomfortable about the landlord sending you this substantial and atypical invoice now that your lease has expired.  It may be for a perfectly valid charge that the landlord overlooked, but it has an odd and aberrant feel of someone hoping to grab some easy money from a responsible tenant that has paid conscientiously for every rental charge assessed over the lease term.

3.)  Be very cautious if you are told that the $5,000 represents many combined CAM expenses that were missed or over-looked during a term of several lease years.  Note that in some (not most) jurisdictions, the local county, state, or municipal regulations / laws do not allow a landlord to assess tenants for charges that go beyond the most recent fiscal year.    Additionally, some landlord's have been known to assess this multi-year batch of additional CAM expense at the end of a lease because they know that it is costly for a Tenant to compensate an accountant to review several years of CAM expenses.   
    The tenant is likely to pay the additional "reconciliation" assessment to avoid the hassle and complication of the extra years of the verification process.        

4.) Some leases have a provision included that specifically exclude a tenant from being allowed to "audit" the landlords books and records to verify the landlords assessments of CAM charges.  Check the text of your lease carefully to determine if your lease has such a provision excluding your ability to review the CAM records to verify the accuracy of the landlords CAM assessments.   If your lease contains such a provision you should have had it excluded from your lease before you signed the lease, however, you may find that your local  Landlord / Tenant laws (referred to commonly as "L&T Law") stipulate that such a provision in a lease is invalid and will not be recognized by the courts in your jurisdiction.  You can often locate a copy of the local Landlord and Tenant Law on-line.  

5.) Realize that when you are a tenant occupying leased premises the landlord controls, the landlord has the intimidating ability to file a legal action in court to evict you from your premises - a nightmarish fear for an on going business venture even if you are certain of your innocence.  This is the primary tool that a landlord has to assure that a tenant's rent and CAM charges are paid on time.  Once you have moved out of the property after your lease expires, the threat of eviction is gone.  
    
   Remember though, that your landlord - if it hasn't done so already -  still has the ability to use any and all funds it may still hold as your security deposit to paying the $5,000 bill.  I hope that you are lucky enough to have already had your security deposit returned by the landlord.   
  
    If, after reviewing the landlord's accounting records, you and/or your accountant discover VALID reasons to withhold all or a portion of the $5,000 requested payment for the landlord's "reconciliation" bill, you should attempt to resolve the disputed matters in a meeting with the landlord and his agents.   If you still cannot resolve the dispute, send a detailed written explanation why you question the validity of the charge via certified mail to your landlord.  This letter may be used as Exhibit #1 some months later in a court case, so write the letter professionally and appropriately for proving your case.
 
    Provided you have already vacated the premises, your landlord must then file a legal action to collect the "reconciliation" charge from you.  If the landlord has deducted the $5,000 from your lease deposit (if you have a deposit), the situation will be reversed, and you will need to file a legal action against your former landlord to collect your full security deposit and settle the matter of the outstanding "reconciliation" charge.          

6.) It may be helpful, if possible, to check with any other tenant that has moved-out, to discover if they also received such an assessment for  "reconciliation".  This may be difficult information to discover, but perhaps very helpful to know if this invoice may reflect a pattern by the landlord, and you wish to question this additional charge.

7.) Rarely I have seen a landlord send a tenant an additional and similarly curious CAM charge of $500 or $2,500 ostensibly for "Administration" or "Management Fee".  Upon investigation, I have found this occurs when a clerk discovers that the landlord is  entitled to charge tenants for such services - administration and management - as a part of the CAM charges, but they had overlooked  their inclusion previously.  Staff preparing CAM charges commonly don't know the accepted manner the industry uses to compute either fee, and they simply pick an even number that they think seems fair,(excluding computation of the pro-rata share) and include a fee for both services, when the practice is usually to charge only for one service or the other - but never both.

I have attempted to make a very complex matter easy to understand.  Please send me a follow-up question if I can be of further assistance in your efforts.

Good luck,
-Jim