Keep a Close Eye on Management Fees

The language of common area expenses, also known as CAM (common area maintenance) or NNN (triple net) expenses is never standard in commercial leases.

Although there are provisions that appear to be the same from one lease to another, there could be subtle differences.

I recently reviewed a lease for a client opening a restaurant in the San Diego area and I did a double take after examining the breakdown of fees associated with the common area expenses. The subtle language had to do with the landlord’s management and/or administrative fees. These fees are typical in leases, allowing the landlord to collect overhead and/or profit in managing or administering all the components involved in operating a professional building or retail center.

There are a variety of expenses in common area expenses such as property taxes, insurance, maintenance, repairs, replacements and just about anything else including capital improvements.

The landlord’s fees typically range from 10 to 15 percent of the overall common area charges. In the case of the restaurant, the landlord had the management/administrative fee as a percentage of the rent versus the actual expenses of the shopping center. This added considerable expense above and beyond what is normal.

This is just another subtle way for the landlord to sneak in some extra revenue without the tenant knowing it.

Speaking of sneaky and subtle… what would you think if you wanted to sell your business and the landlord not only blocked the sale unreasonably, but also attempted to recapture the premises and force you out of business?

Yes this really happens. See the below excerpt from my most recent news column in the Press Enterprise (www.pe.com), March 6, 2016:

For years I have been writing about the hidden dangers of the landlord’s custom lease language and that there is no such thing as a standard lease. I have been writing these articles for the benefit of all small businesses and those ancillary resources that help support their cause, yet to my dismay, I still see new tricks that many landlords use against unsuspecting tenants that are not familiar with the impact the leases they sign have on their business or their entire lives. Case in point, There is a 1,500 square foot retail business in Southern California that recently won a victory to have their rent lowered to market versus the 50% above market rent the Landlord was trying to get. Once the battle was over to achieve market rent with the Tenant being victorious, the Tenant was desirous of selling their business after 10 years of hard work building it up.

What happened next was a total shock to the Tenant, the Landlord wanted to exercise their right to cancel the lease and recapture the space due to very onerous and restrictive language in the lease contract.

Recapture means the Landlord can take your business from you.

The Tenant was totally unaware that this language existed and basically taking away their rights to sell the business. The recapture language in leases is quite common in addition to other rights the Landlord has, such as taking all or half of the profits derived from the sale of a Tenant’s business. This lease language is commonly overlooked and the Landlord, their brokers, and managers are not required to disclose such disastrous language to the Tenant.

It is all a sign of the times, as the economy has continued to pick up steam, Landlords are looking for new and creative ways to increase their profits at the expense of the business owner. In the case of 1,500 square foot retailer, they received a notice from the Landlord’s attorney to relinquish their premises in 30 days because of the potential sale. This action required the business owner to hire an attorney to defend their right to keep the business.

In a marketplace with rising rents, it is crucial that the commercial Tenant understands the lease they are signing as they can be modified and re-written more favorably. This aspect of the leasing process is seldom discussed in the negotiations as the main focus is typically the rate per square foot, tenant improvement allowances, concessions, options, etc. Through my experience, most, if not all, Landlords will agree to remove the recapture language if asked to do so before the lease is signed, however the language has to be identified before asking to be deleted. There are many other hazardous lease provisions that Landlords will be open to changing as long as the points can be argued intelligently.

It is always best to have an independent, unbiased professional specializing in the field of commercial real estate leases to assist in the review and modification of those documents before they are signed.