Expert: Phil Nicols - 2/1/2010

Question
QUESTION: Provided reconcilation of CAMs to tenant that showed a 6 cents a foot in monthly cost increase. It was in a spread sheet format.  One tenant is asking for all invoices for every expense over the past two years.  this is highly unusual and I do not want to open the door to having tenants approve every expense, nor do I want to go through the cost of having the records provided.  I have rented as a tenant and rarely had landlords provide anything.  This is my second year as a landlord.  Do you feel this is over the top and do I really need to provide anything at all.

ANSWER: Jefe

Welcome to being a landlord.

First, you have to refer to the lease. What does it say in reference to this? In a fairly standard lease, it usually says things like, "landlord will provide an accounting to the tenant once a year, but the tenant may contest these charges" (I modify this in all my leases depending on who's side Im working for)

.. you have to be able to justify your cam charges. you cant just say it cost 10.00 /sf to run the place and charge them.

you really need to know your cost base. I dont know how you could run a commercial property without that knowledge. Normally, a landlord or property manager will have an electronic filing system for this. You should keep bills too.

Also it depends how far they want to press you.

Lesson number one: Anyone can sue Anyone for Anything! And the outcome depends on who tells the best story, proof of that story and also what mood the judge is in that day. There is no black and white when it comes to law.

First try to negotiatie with the tenant. Find out what they after. How is their business doing? Chances are their business is not doing well, so they want to grasp at any strings they can.

It might be as simple as the tenant just wanting an accurate book keeping or
They might want to stay but want a rent reduction,
They might want out of the lease and are looking for a handle
They might want to screw the landlord for as much as they can - some people are like that - they dont feel good unless they feel they can get something for nothing.

I would bet they are not doing well however cause when tenants are making money, there are usually no issues.

Try to avoid court at all costs! No one wins in court except maybe the lawyers and the judge who gets paid either way.

So in summary first, refer to the lease.
2) do only what you have to which is written in the lease
2b), find out what they want (motivation for this request)
3) avoid court - if you cant get anywhere with the tenant, try a mediator first or paralegal before going to court (if it gets to that stage)

if you have been knowingly overcharging the tenants for years, Id be getting a good lawyer, but on the other hand if you have nothing to hide, then talk to your tenant.

ps, praying never hurt either. I try to go to Church once a week and I pray every night too.

best, Phil

---------- FOLLOW-UP ----------

QUESTION: Thank you for your response. See below the verbage out of our actual lease.  I do not see anything about the tenants right to challenge or for landlord to defend his expenses!  Looks the tenant refuses to have a meeting prior to reviewing all invoices!  Any final thoughts before I move to seek council?
jefe.
BASE RENT:  Tenant’s Base Rent shall be $1.65 per square foot on a monthly basis (1160 X 1.65 = $1914 per month) for the first two years.  At the start of the 3rd year Base Rent shall increase by 3% and on subsequent anniversary years Base Rent shall increase by 3% until lease renewal.  

ADDITIONAL COSTS:  This is a NNN lease and tenant shall be responsible for Insurance, Gas, Electricity, Internet and all other utilities.

CAMS:  Common area maintenance shall be an additional charge at .385 per foot on a monthly basis (1160 X .385 = $447.00 per month).  Property taxes and common services are estimated and will be reconciled on an annual basis.  If actual costs are higher, tenant will make up the difference within 30 days of receiving an adjusted statement.  If actual costs are lower than tenant shall receive a credit towards future CAM costs.

TENANT’S PRO RATA SHARE:  The parties acknowledge that the premises represent a portion of the building.  Tenant’s pro rata share of any costs chargeable to Tenant as used throughout this lease shall be based on square footage of 1160.

Answer
Jefe

final thoughts -- yes:

1) I would have to read the actual language buy it sounds like you are pretty well covered as you say it is a triple net lease to the landlord.

2) I don't know where you are located but those costs seem pretty low. Where I am, basic strip plaza common area costs are in the 10.00 /sf/y range.

2b) I would have examples ready for similar properties in your area to show that you are not out of whack on your costs.

3) probably most importantly, you say they are contesting the charges, so let them. YOU SHOULD NOT initiate any legal proceedings in this case. Unless they are not paying their rent or something -- just because they question your expenses is NO reason to NOT pay rent or TMI - they are separate issues. Don't initiate action unless its your ABSOLUTE LAST DEFENCE! I mean, if they are not paying you and are not willing to meet or talk about it, then yes, you have to sue them. BUt you also have to justify  it....eg, you might be 100% right and you may well WIN the court case but then they simply say "BANKRUPT" which basically quashes all bets! They could simply tell the court they have no ability to pay you, in which case you will also be out costs.

See, you could "Win the battle but LOOSE the war." I had lots of these cases where tenants walked and said, "sue me". Guess what? I let them walk. Unless your tenant is a major national tenant, chances are they have nothing to loose.

If they were a major chain, its likely you wouldn't be in this position....

which brings me to the point of INVESTMENT. Many people ask me to find them a plaza, typically lowest price, with highest returns. Thats not impossible but sometimes its not the be all and end all either. A property is only as strong as the tenants. really doesn't matter if they have a rock solid, 250 page lease becuase at the end of the day, the BANKRUPTCY BUTTON (as I call it) has way too much power (at least here in Ontario).

good luck.

best, Phil