Expert: Jim Avancena, CPM - 7/26/2010

Question
Good afternoon Tim,

I read your response regarding a tenant feeling like he was being cheated by his landlord in regards to CAM charges. I represent the other side of this question. I work for my family's commercial real estate company in southern California. We recently received a letter from a law firm requesting information on behalf of one of our tenants. They're basically asking for a reconciliation of CAM reserves and how we allocated these funds towards the common areas. This is a legitimate request. The only problem is they have been our tenants for over 20 years and they're asking for all 20 years worth of documentation. This seems a little ridiculous considering they have been paying without question this whole time. We have delivered a breakdown of all expenses that we incur each year to our tenants, on time (per our lease agreements). This particular tenant has been suffering during these slow economic times (as has everyone)and requested to get out of there lease 3 years early. We declined and that is when we received this letter. Are their requests at all warranted? Or does this just seem like a desperate attempt to get out of paying their rent? They have been over 10 days late on payment for the last 2 months and we fear this is only going to get worse. The letter that we received was not certified so I believe that we're not required to respond. I was just wondering your opinion on this matter, and if there were some kind of statute of limitations going back that far? We've had no other complaints from any of our tenants in our 11 properties during the last 25 years of business. Before we start paying legal fees and digging through files I was just hoping to get your advice on this matter. Thank you in advance for you time in reading this letter.

Sincerely, Chris Culver

Answer
Chris:

I have several thoughts about your questions.

First, be sure that the materials that you provide your tenants is in strict compliance with each tenant's individual lease text. In these tough economic times, I would be as helpful as possible in providing materials that clearly vouch whatever a tenant is focused upon.

I have seen massive "errors" in how reserves are computed and billed in many areas of the country.  Reserves of any kind are always of interest to tenants, and they usually get a judges close attention in court.  Again, be certain that your reserves are strictly in compliance with the wording of the tenants' lease text and you might consider explaining to the tenant the standard practice in the industry regarding reserves in your market area.   That will probably be where a legal challenge would start if it goes that far.

Twenty years is an excessive request, however, as you know, the statute of limitations varies in the different areas across the country.  I suggest you provide massive detail on the last three (3) years reserves, how they were applied, and how they were billed to your tenants.  If there are no signs of a problem based on that three year period, and the tenant has no valid basis to show cause, you have probably treated your tenant fairly and the matter will go away.   However, if significant mistakes are found in that three (3) year period that appear to benefit the landlord, you may find that the details of additional years will likely be requested and the local court may have to weigh the statute of limitations versus other legal considerations such as the landlords fiduciary duty to its' tenant and when the tenant knew or "could have known" based on the circumstances, etc.

You might consider assisting the tenant with some alternative options if they are struggling.  

Might your tenant consider a mutually acceptable lease restructuring that might be workable to both parties?    

Does the tenant have a realistic opportunity to acquire a subtenant or assign, or are its germane lease provisions overly restrictive?

The late rental payments suggest a legal challenge is possible.  I assume that the lease involved contains a provision that the tenant waives its' right to a jury trial.  Common sense would argue for you to find another solution if a jury were to be formed to find a 20 year tenant guilty of failing to pay additional rent during killer economic times - especially if the dispute focuses on reserves.   

I have been involved with dozens and dozens of CAM and Operating Cost Reimbursement cases, and in the absence of a failing tenant having provided personal guarantees, few dollars seem to finally flow back to the landlord following such courtroom success.  

Many would reasonably argue that a landlord needs to respond to such tenant challenges to deter other tenants from copy cat actions, however, be circumspect in the way you approach a struggling twenty year tenant.

- Jim