Common Area Maintenance Charges (CAM) Explained

Posted by Lee Sterling | Posted in Carlsbad, Economics, Landlord-Tenant, Legal, Negotiation, North County, Office, Real Estate | Posted on 11-08-2012

 

This is a follow-up to a brief talk I gave to the Business Resource Committee of the Carlsbad Chamber of Commerce about the difference between Rentable Square Feet and the Usable Area of a building and the impact of the Load Factor on evaluating the cost of renting one commercial space compared to renting another  space in a different building.  Because of the Load Factor, the usable sq. ft. of the tenant’s space is lower than the rentable sq. ft. charged to the tenant.    I briefly mentioned the impact of CAM charges on that evaluation. This follow-up is so that I can point out some things that a tenant needs to keep in mind when evaluating CAM charges and the lease the tenant may be considering.

PRO RATA SHARE

This is another time that the Rentable Sq.Ft. and Usable Area are important for the tenant to evaluate. The ratio between the tenant’s Rentable Sq.Ft. and Usable Area results in the percentage of the CAM charges that are going to be paid by the tenant. If the Usable Area in a building is 100,000 sq. ft. and the tenant’s rentable sq. ft. is 10,000, the tenant would be charged with paying 10% of the CAM charges as the tenant’s pro rate share.

WHAT OPERATING EXPENSES

Unfortunately, some landlords have tried to use CAM charges as another profit center! It’s important for the tenant to review what is going to be included in the CAM charges. They should not include capital charges, upgrading to comply with laws, or repairs and maintenance,  which are topics we’ll cover in another blog post.  A good way to evaluate the CAM charges is to request the records for the last three years of the CAM charges. That will allow the tenant to see what kind of increases have been charged to existing tenants.

THE BASE YEAR

If a tenant enters into a gross lease (in which the landlord includes all expenses in the base rent for the first year) the tenant has to make sure that it is not charged for any expenses during that base year. In evaluating expenses, it’s also important to make sure that expenses are “grossed up,” which is another topic to be covered in a separate blog post.

COMPARISON TO OTHER PROVISIONS

The tenant should always check the CAM charge provision against the repairs and maintenance provision, the real property clause, and the compliance with laws provision to make sure that the landlord doesn’t try to include any of those costs in the CAM charges that the landlord may have agreed to pay in these other provisions.

WRAP UP

These are just a few hints on evaluating the CAM charges provision of a proposed lease. It’s important for the tenant to have a good broker helping to evaluate the lease, and to have the lease reviewed by a competent licensed real estate attorney.

 

Lee Sterling is a retired Colorado real estate attorney  and California real estate broker working with commercial tenants looking for space to buy or lease. He can be reached at 760-230-1492 and at lee@leesterling.com    

DRE Lic.# 01319489

 

 

 

 

 

 

 

Tenants – Who’s Fixture Is It? Check Your Lease!

Posted by Lee Sterling | Posted in Economics, Landlord-Tenant, Legal, Miscellaneous, Negotiation, Real Estate | Posted on 08-06-2012

Did your tenant representative  reminded you to review what happens to your fixtures at the end of the initial term        of your lease, and what happens if you renew the lease? And did your representative describe what might be a trade fixture and what might be a fixture? California has described fixtures as “a fixture is a thing that is so attached to realty as to be considered in law a part of the realty itself,” and a trade fixture as a “[fixtures] placed on leased premises for the purposes of trade.”  Absent specific language  in the lease, a tenant has no right to remove fixtures at the end of the lease term, but MAY remove trade fixtures during the term (and for a reasonable time after the end of the term) “if the removal can be effected without injury to the premises…”

 Another complication arises if you holdover, renew or extend your lease. California has determined that if you holdover, that means staying in the premises after the term of your lease has ended, absent specific language to the contrary, the fixtures AND the trade fixtures become the property of the landlord.  And if there’s nothing in the renewal of the lease that allows you to remove the fixtures or trade fixtures that were installed during the initial term you may have lost the right to remove them at the end of the renewal term.

What’s obvious is that a seemingly simple provision in a lease may be more complicated than the average tenant may understand.  That’s why you need to  make sure that you review your lease carefully, get good advice from your tenant representative, and have your lease reviewed by a competent California real estate attorney. There are lots more of these “gotcha” clauses in a typical “standard” lease.

 

Why Comply with the Architectural Committee (AC)

Posted by Lee Sterling | Posted in Economics, Legal, Negotiation, Real Estate | Posted on 15-04-2012

It is rare to find an architectural committee (AC) in commercial developments, which are often controlled by the original developer. However, architectural committees are often found in residential developments where homeowners want to maintain the overall look, feel, and value of the development in order protect their home investment. The provision for an AC is found in the  Covenants, Conditions & Restrictions (CC&Rs) filed with the Clerk and Recorder, which then controls the land described in the CC&Rs.

Some homeowners ignore the requirement to submit plans and get approval of the AC.  And, some, if they’re unhappy with the decision of the AC just go ahead and build what they want. A recent California case confirmed that it’s expensive when you don’t comply! The same principal would apply if there were a commercial AC.

The Stantons decided that they wanted new casement windows on the front of their home in a condo development controlled by CC&Rs. Those are normally included as part of your Homeowner Association (HOA) documents, or “docs.” You know that packet of 50-or so pages you receive just before you close on the purchase of your home. The boring and detailed material you have to read when you get home from work when you’d rather just relax for a while.

The CC&Rs often provide what kind and size of animals you can keep on your property, where you can park your car, and what you have to do if you want to make additions or changes to your property. Often (usually) there’s an architectural review committee (ARC) and specifications as to paint colors permitted for the exterior of your property. In the Stanton’ development, the ARC had a policy of maintaining a dark shade of brown on windows that generally faced the street of the development.

The Stantons applied to the ARC for approval to permit them to install two sandstone-colored casement windows on the front of their home, along with an application to make other exterior improvements. The ARC denied the Stantons the right to install the sandstone casement windows. Notwithstanding the denial, the Stantons went ahead and installed the sandstone-colored windows! The Association then filed suit asking for injunctive and declaratory relief requiring the Stantons to modify or replace their windows AND for the Association’s attorney’s fees.

You can see the type of brown windows the ARC liked, although not taken from the actual development involved in this dispute.

 

 

 

 

 

 

 

Here’s a sample of sandstone windows. Again, not taken from the actual development involved in the dispute. However, it does give you an idea of the difference between “brown” and “sandstone.”

 

 

 

 

 

 

 

 

 

So, who do you think won in the litigation, and how much were the attorney’s fees awarded to the winning party?

Of course, the Association won. The Association asked for $83,0227.50 in attorney’s fees and $4,298.72 in costs. The trial court approved the costs, but cut down the attorney’s fees to $59,122.50 plus the costs! And the Stantons had to replace the windows to comply!! That pales in comparison to the $ 318,293.50 awarded to the attorneys representing the Rancho Santa Fe Association in their dispute with a homeowner who refused to take down a fence she had put up without the appropriate approval, but that’s a story for another day.

So, don’t forget to apply to the Architectural Committee for approval of your changes, and don’t proceed without approval!

 

Lee Sterling is a retired Colorado real estate lawyer, who represents commercial tenants looking to buy or lease commercial space.

Employee Entitlements

Posted by Lee Sterling | Posted in Economics, Industrial, Legal, Miscellaneous, Negotiation, Office, Real Estate | Posted on 23-03-2012

Do you have employees? Have you discussed the issues described in the attached video? I got this from my friend, Bill Marvin, The Restuarant Doctor:

Do You Have to Pay CAM Insurance Charges?

Posted by Lee Sterling | Posted in Landlord-Tenant, Legal, Negotiation | Posted on 25-03-2010

A Typical ShoppingCenterThe Common Area Maintenance (CAM) charges paragraph of a lease is always important. It should detail what charges are included, and, by implication, what charges are not included.

In a recent New York case *, the lease CAM paragraph didn’t define all the charges, but did indicate that they included annual property taxes. After paying CAM charges for two years, including the tenant’s proportionate share of insurance on the property, the tenant realized that, perhaps, it wasn’t liable for insurance under the terms of its lease. The tenant sued to be reimbursed for the insurance portion of the CAM charges it had paid.

The court noted that the lease didn’t define the CAM charges, other than that it included the property taxes, and that the lease did have an insurance clause obligating the landlord to maintain insurance. That insurance clause did not mention a tenant’s obligation to pay its share of those costs.

Based on the lack of definition in the CAM clause, and the lack of requirement for the tenant to pay a proportionate share in the insurance clause, the court determined that the landlord would have to reimburse the tenant for its payment of those insurance charges.

What this points out, once again, is the need to have good counsel review your proposed lease to make sure you understand your obligations as a tenant. A well-qualified Tenant Representative and your real estate attorney should be able to tell you exactly what your obligations will be under your lease.

*I review the Commercial Tenant’s lease Insider, a monthly newsletter I receive, and this case was mentioned in the February issue.  The shopping center photo is from the Merriam-Webster Visual Dictionary Online.

Who Pays When Your Customer Gets Hurt and Sues? You Or The Landlord?

Posted by Lee Sterling | Posted in Economics, Landlord-Tenant, Legal, Miscellaneous, Real Estate | Posted on 06-03-2010

slipandfall

You have leased space in a Carlsbad office/warehouse building, and your lease provides that you are responsible for interior maintenance of the premises and the landlord is responsible for the roof, exterior walls etc.

The Accident

Last year a customer walked into your office, and slipped in a puddle of water caused by a roof leak that you had complained about to the landlord, which had not been repaired at the time of the accident. The customer suffered a broken back, had major medical bills, loss of work, and possible long-term disability.

The lawsuit

Guess who gets sued!  Right, both you and the landlord. Fortunately, your insurance company settles with the accident victim, and your insurance company proceeds with the claim against the landlord. It becomes a battle between your insurance company and his insurance company. Your insurance company is claiming that the landlord should pay your insurance company for the money it paid out to the accident victim to settle the matter.

The landlord argues that the lease required you to obtain insurance, which you did, and that the Indemnification clause of the lease meant that you had to cover any damages resulting from an injury in your leased premises.

The Indemnification

So you look at your lease, and you find the indemnification clause that reads: “Tenant hereby indemnifies and agrees to save harmless landlord from and against all claims, unless such claims are caused solely (my emphasis added) by the acts or omissions of landlord, which either: (1) arise from or are in connection with the possession, use, occupation, management, repair, maintenance, or control of the Premises or any portion thereof; (2) arises from or are in connection with any act or omission of Tenant’s or Tenant’s agents; or (3) result from any default, breach, violation or non-performance of this lease or any provision of this lease by tenant.

Your insurance company’s attorney argues that the puddle on the floor was caused by the roof leak that had not been repaired after your reported the problem, and that the landlord was liable.  The landlord’s attorney argues that there was a roof leak, but you failed to maintain the premises properly and that you should have dried up the puddle so the landlord was not solely responsible for the accident.

Who wins?

You be the judge. The lesson is that one word, out of the thousands, in the lease can dramatically affect your rights and obligations. Be sure you have a knowledgeable real estate agent helping guide you, and have your lease reviewed by your real estate attorney before signing it!

World Trade Center Arbitration – What It Might Mean To You

Posted by Lee Sterling | Posted in Economics, Landlord-Tenant, Legal, Negotiation, Real Estate | Posted on 27-01-2010

World Trade Center Site

World Trade Center Site

The New York Times reported recently that Larry Silverstein, who leased the trade center complex six weeks before it was destroyed in the 2001 terrorist attack, and the Port Authority of New York and New Jersey just received the results of an arbitration hearing, with both of them claiming victory. Silverstein complained that he had been delayed in the construction of three new office towers by the actions of the Port Authority, and the Port Authority claimed that Silverstein had to begin construction immediately or he would lose the right to the lease. Silverstein lost on his claim of delay asking for damages, and the Port Authority lost on the demand that Silverstein commence construction. The parties were ordered to work out a reasonable construction schedule.

The reason I raise this issue is that the standard lease used by many commercial brokers in Southern California is the AIR COMMERCIAL REAL ESTATE ASSOCIATION standard Industrial/Commercial, Multi-tenant Lease, which gives the parties the choice of including or not including mediation and arbitration as part of the lease. If chosen, an Addendum pertaining to those clauses has to be attached to the lease.

As a tenant, you have to determine whether or not you want to provide for Mediation and Arbitration. This important decision is often dealt without much thought. YOU SHOULD DISCUSS THIS WITH YOUR COUNSEL.

Arbitration was once thought to be less expensive than litigation, but today as much expensive discovery and pre-arbitration work is involved as in litigation. You need to evaluate, with the help of counsel, whether mediation and arbitration will resolve matters more quickly, or be less expensive. Arbitration is usually private as opposed to public trial. Is that a consideration?

There are many other issues to be concerned with if you choose mediation and arbitration. Don’t agree to mediation and arbitration without careful consideration of the many issues that your counsel should review. If you’d like to discuss what issues you might want to raise with your counsel, I’m available at 760-230-1492 or at Lee@LeeSterling.com.

A is for Apple And Also Attornment

Posted by Lee Sterling | Posted in Carlsbad, Encinitas, Landlord-Tenant, Legal, Miscellaneous, Negotiation, North County, Oceanside, Real Estate, San Diego | Posted on 30-10-2009

leaseform

We now get to the A of SNDAs (Subordination, Non-disturbance, and Attornment Agreements in leases.) First a brief recap of Subordination and Non-Disturbance. You may remember from our previous articles that if you’re a tenant, and you’ve agreed to subordinate your interest in the lease to any mortgage, trust deed of other security device, and the holder of one of those security devices forecloses, your lease may be terminated. Leases usually provide for that subordination to security devises even if they are created after the lease commences. The non-disturbance clause protects you in the event of a foreclosure (or in the event the property is sold to another owner) by providing that if you’re not in default you’ll be able to keep your lease in effect.

The attornment clause stems from the old feudal law that there was a personal obligation between the lord of the manor and his tenants, and that those obligations were reciprocal. The consent of the lord was required for a sale of the tenant’s interest, and the consent of the tenant was required for alienation (sale/transfer) of the reversion or remainder interest in the property. Thus, the lord could not alienate his reversion or remainder interest without the consent of the tenant. The consent was called an attornment. The necessity for an attornment was abolished before the American Revolution by the English Statute of Anne. In California, the common law rule eliminating the requirement of attornment has been confirmed by statute. However, just to be sure, leases contain an attornment clause that provides that if title to the property is transferred by the Lessor or if title is acquired through foreclosure or termination of a Security Device the tenant will attorn to the new owner.

The language of the SNDA in each lease has to be examined carefully because there are differences that may result from the specific language of the three inter-related clauses. There are some interesting California cases involving the interpretation of SNDAs. Be sure to have the lease reviewed by California counsel before signing any lease.

Lee Sterling was a real estate lawyer in Colorado for 27 years. He is not licensed as an attorney in California. He does have a California real estate license # 01319489.

S Does Not Stand For Superman

Posted by Lee Sterling | Posted in Economics, Landlord-Tenant, Legal | Posted on 10-09-2009

green-shopping-centerIn the past I’ve written about the SNDA clauses typically found in commercial leases: Subordination, Non-Disclosure, and Attornment.  I’ve described the importance of the Non-Disclosure clause.  The terms of the Subordination clause and the Attornment clause are equally important. Today, I’m just going to discuss the “S” of the SNDA, the Subordination clause. I’ll save the Attornment clause for another blog post.

If a lease is recorded or a tenant takes possession of property before a lender records its lien, the lease will have priority.  A Subordination Agreement changes that priority.  Landlords typically will include a subordination clause in the lease because they know that their lender will not lend them money unless tenants are junior to the lien of the lender’s trust deed.  Often the Subordination language imposes subordination not only for existing loans, but future loans and for modifications, extensions, increases, renewals, and modifications etc. of those loans (for ease of reference, let’s call these the “mortgage”).

The lender’s subordination agreement may provide that your lease is subject to the terms of the mortgage.  You definitely don’t want that!  You don’t know the terms of the mortgage, and don’t want to be bound by what you don’t know. You can agree to be subordinate to the lien of the mortgage.

A tenant has to be concerned about the terms of the Subordination Agreement because it may give rights to the lender without corresponding obligations.  For example, if the landlord had agreed to pay for certain tenant improvements prior to a foreclosure, and the Subordination Agreement is silent on the obligations of the foreclosing purchaser, the foreclosing party may not be obligated to pay for those improvements.  The Subordination Agreement should give you the right to terminate the lease if such obligations are not met.

In the event of insurable damage or condemnation prior to a lender’s foreclosure there may be a dispute as to who is entitled to proceeds resulting from those events.  That’s another issue that should be covered in the Subordination Agreement.

We’ve covered just a few of the issues to be considered in reviewing a Subordination clause and the lender’s Subordination Agreement. Be sure you have the right advisor helping you review the lease terms.

The Subordination clause has to be considered in conjunction with the Non-Disturbance and Attornment clauses of the lease.  The terms of the SNDA are often overlooked by anxious tenants, and often accepted without negotiation by the unsophisticated.  Don’t fall into that trap.  There’s interesting California case law pertaining to SNDA Agreements, and you don’t want to become known by being cited in appellate cases!  For questions about these issues always see your counsel before signing a lease.

Tenant Protection When Landlord’s Property Is Foreclosed!

Posted by Lee Sterling | Posted in Landlord-Tenant, Legal | Posted on 20-05-2009

evictionnotice
I’ve mentioned the SNDA in previous posts (Subordination, Non-Disturbance, and Attornment). The ND portion refers to non-disturbance of the tenant’s right to have its lease recognized as valid in the event of the foreclosure of a senior trust deed. The S refers to the Subordination clause and the A refers to the Attornment clause. I’ll discuss the Subordination and Attornment clauses in separate blog posts. From the Tenant’s standpoint, the non-disturbance clause (“ND”) is most important.

The use of the Non-Disturbance Agreement depends on the timing of the recording of the trust deed and the recording date of the lease (or the recording of a Short Form Notice of Lease) ,collectively “Notice”. Usually neither the Tenant nor the Landlord want the whole lease recorded. The lease may or may not provide for the recording of a Short Form Notice of Lease. As a Tenant you may want a Notice recorded. Check with your attorney for advice.

California follows the race-notice theory of recording. The first legitimate document recorded has priority over subsequently recorded documents. If a trust deed is signed on January 2, but not immediately recorded, and the lease is signed on January 10 and its Notice is recorded on January 11, while the trust deed has not yet been recorded , the lease would have priority over the trust deed. If the trust deed were subsequently foreclosed, it would NOT have the right to evict the Tenant so long as the Tenant was not in default under the terms of the lease.

However, if the trust deed were RECORDED first the lease would be subject to the priority of the trust deed. If the trust deed were foreclosed, the foreclosing party could evict the Tenant! The reason most Tenants want the ND is that they usually have spent quite a bit of money on leasehold improvements, moving costs would adversely impact their bottom line, they may have spent substantial amounts branding their location, and they may be out of business while moving to a new location. A Non-Disturbance agreement should protect the Tenant in those circumstances.

Before entering into a lease, or when renegotiating a lease, the Tenant should determine whether or not there is a recorded trust deed encumbering the property. If there is, the Tenant should make it a condition of the lease that the Landlord provides a Non-Disturbance agreement signed by the lender. Obtaining a Non-Disturbance Agreement often depends on the negotiating position of the parties. A tenant leasing 1,000 square feet of retail space in a mall probably won’t be able to obtain the lender’s consent to a Non-Disturbance agreement. However, a major Tenant in a development should insist on an ND agreement. Merely having the ND clause in the lease will not protect the Tenant if the lender has not provided the signed agreement. The ND clause may provide that the Landlord will use its best efforts to obtain the lender’s Non-Disturbance Agreement. In the standard lease used by commercial brokers in Carlsbad and the rest of San Diego, the lease ND clause provides that if the landlord doesn’t obtain the ND agreement within 60 days, the Tenant may go directly to the lender to try to obtain the Agreement. Without the lender’s signed agreement, the Tenant is at risk. There are various forms of ND clauses and agreements. Be sure to have the language reviewed by your attorney if you want to protect your rights to retain your lease rights in the event of foreclosure.

If you have general questions about commercial leases, please send us a note at Lee@leesterling.com