Expert: Jim Avancena, CPM - 7/8/2008

Question
Hi Jim - This question is quite similar to others you have answered very well in the past.  

Is there any legal basis to contest CAM charges paid into a reserve account if I have signed my lease which authorizes such charges?  I have been in my lease for multiple years and was only recently charged for such items after a sale of the property and new landlords took over.  The landlords claim that they will be using the funds to replace the roof and repave the entire parking lot.  I realize that these are likely capital expenditures, but my lease also contains multiple references to "replacements" and charges for capital expenditures spread out over 12 years.  They have not given me any firm date on when such improvements will be made and I am afraid that they will continue to require payments into the reserve account without actually implementing any of the promised changes (also, the lease does not cap the reserve account).  The reserve account, however, only states that it is for "maintenance and repair of common areas."  Does this mean that funds for replacing the entire roof and parking lot, which I assume are capital expenditures, cannot be properly obtained via payments into the reserve account?

Lastly, if I am obligated to pay for capital expenditures which are deferred over a 12 year period, what happens if my lease expires before the end of that period?  Do I have to continue paying even my lease is expired, or does that expense get passed on to the next tenant?

Sorry to ask so many questions, but I am afraid that the new landlords have sinister motives and would like to be well-prepared in the event I am forced to take legal action.  Thank you for your help.  

Answer
Brent-

I still cannot believe that any tenant allows a landlord to charge them for "reserves".   

The new landlord realized that he can use this lease provision to rebuild the property and charge it to you and the other tenants!  The previous landlord didn't have the questionable ethical sensitivities of the new landlord.

Some thoughts:

1. A replacement is a capital expenditure if it has a useful life of over one year.

2. Try to have an attorney leverage the language you quoted about the description of the reserve account; "for maintenance and repair of common areas" to save the financial future of every tenant that agreed to pay for "reserves".  I don't know the answer to your question about replacing the roof and parking lot without reviewing your entire lease, but it may be a big help.

3. You only pay the payments for CAM charges - which includes the reserve account - during your lease term.  This is one reason why reserve payments by tenants are so bizarre.  You are paying the landlord to rebuild a structure that will be there - because you paid to rebuild it - making the landlord rental income for years after your lease expires.  I hope that the next tenant that goes into your space when your lease expires has got the sense to ask these questions BEFORE he signs his lease.

4. I am surprised that no one has brought this provision to the attention of the State Attorney General as a questionable business practice.  If you are paying to rebuild the building and all of the expenses to maintain it, what does your rent pay for?  I would expect that my rent payment covered the cost of the landlord providing a building or shopping center that is in good condition, and my business can move into and function fully without me having to pay anything more.    Shouldn't you be able to expect that if you pay the landlord the rent he wants, that you won't also have to pay to fix or replace the roof?

5. Before you agree to pay for capital improvements, ask the landlord for a report telling you what capital improvements will have to be made during your lease term.   

Brent, have someone that understands the "fine print" lease provisions read your next lease before you sign it.  I wish you luck with this provision.  Expect that the reserves charges portion of your CAM charges is going to get ugly before your lease has expired.

-Jim