Sophisticated commercial tenants generally understand that the cost of leasing space is not limited to rent. Most retail and higher end office spaces are net leases and therefore, include a separate charge for Common Area Maintenance and Operating Expenses (CAM). CAM charges are the charges that the landlord incurs for running the common areas of the building, such as utilities, maintenance, taxes, insurance, security and the roof and structure. Depending on the tenant’s size and financial strength, care should be given to negotiating what is included in the definition of CAM and what is specifically excluded. I’ve written on this topic before (see post HERE).

Another factor in negotiating CAM from the tenant’s perspective is limiting the increase from year to year. Again, there are tools to help limit tenant’s exposure to significant increases to CAM charges (discussed in my previous post and also HERE). But once the CAM provisions have been negotiated and included in the lease, tenants can’t forget about them. If they do, tenants could be faced with improper CAM increases or charges.

In my practice, I am asked what to do about large CAM increases all the time. When I have been the one to have negotiated the lease, the process is usually simple and the same. There are 2 questions of concern. First is the reconciliation of the prior year’s CAM. That occurs because landlord has underestimated the actual operating costs for the building for the prior year and tenant is required to “true-up”. The second is the new charge for the coming year. If landlord under budgeted for the prior year, the new charge should factor in the short-fall plus a percentage increase for the coming year so that the tenant will not suffer sticker shock.

The review process is not complicated in a properly drafted and negotiated lease. Within a certain number of days following the end of the calendar year, the landlord should provide an operating statement showing the reconciliation including the original budget and the actual budget. The tenant will have a period of time to object and, if desired, audit landlord’s records to determine accuracy. If tenant’s audit finds a discrepancy over an agreed percentage, landlord pays the cost of the audit and sometimes, a penalty to tenant. If tenant still owes, tenant pays. Tenant also has the right to review the proposed budget. If there was an audit, the audit should give the tenant some insight as to the accuracy of the new budget.

If landlord fails to timely deliver the reconciliation, landlord waives its right to collect any shortfall. CAM, however, should be adjusted up or down, at any time during a calendar year. While tenants might look at this provision as giving a landlord too much discretion, it is better to make incremental changes during the year than to be faced with a large reconciliation at year end which must be paid in lump sum on 15 days’ notice. And, because tenant should have the right to audit, the payments can be recovered if found to be improper.

Sometimes, actually, often, I get leases that I did not review or negotiate. New clients or even existing clients who didn’t think they needed me or my partners to handle what they considered to be a “simple lease”. Recently, a firm client, who signed a lease before we represented him, was presented with a very large reconciliation. It came at the start of the 3rd calendar year of the lease. This was the first time the client had ever received a reconciliation. He should have received 2 reconciliations previously but apparently, the property manager “forgot” to send the prior reconciliations. As a result, there had never before been a true-up. In addition, the property manager had, for the prior 2 years not increased CAM because he “forgot” to bill the client. Now, the client had a large reconciliation and a large increase. The client had never questioned the property manager, but why would he? His rent increases were small and the CAM wasn’t changing. On the other hand, now he faces a very large bill.

How can the client be certain that the property manager isn’t attempting to recoup the lost CAM going back to the first year? The issue is sloppy record keeping.   By not presenting timely reconciliation statements, the lease provides that the true-up is waived for those first 2 years. Therefore, the landlord is only entitled to catch up for last year. But the sloppy property manager never even prepared a budget those first 2 years so there is no documentation to prove that the client underpaid last year or to prove that the reconciliation is only for last year and not a recovery of all lost CAM. The best that property manager and landlord can do is show us tax and insurance bills over the life of the lease to prove that non-controllable expenses.

In hindsight, I have explained to the client, the lease requires that the landlord provide a budget by December 1 of each year. That budget is to include a CAM estimate for the coming year. The estimate should prepare the client for what is to come in the reconciliation statement. Although these are landlord’s obligations, if the tenant does not keep its eyes open and be aware, a big surprise will come at some point. That surprise is likely to turn into a costly fight.

A Right of First Refusal (ROFR) is the right to match an offer to purchase a seller’s property. ROFRs can be found in different types of documents relating to both real and personal property. Often, they are contained in leases, giving the tenant a ROFR to purchase the leasehold property. They are also used in shareholder, partnership and operating agreements giving “partners” the ROFR to purchase each other’s interest in the entity.

ROFRs often have a chilling effect on a seller’s ability to sell property, particularly real estate. Potential buyers won’t put forth much time, effort or due diligence in looking at a property knowing that an offer could be matched and the property sold to the holder of the ROFR. If a property is very desirable, a potential buyer might have to overpay in order to discourage the ROFR holder from exercising.

Generally, ROFRs require that the holders close on the same terms as set forth in the offer. Therefore, if a seller receives an all cash, no-contingency deal, the holder would have to close without financing and with no contingencies. Sometimes this will also work to the potential buyer’s advantage. While the price might be attractive to the ROFR holder, the terms of the offer might make it difficult, if not impossible for the ROFR holder to close.

Usually, the event that triggers the ROFR is a “bona fide, 3rd party offer” duly accepted by the seller. What constitutes a bona fide 3rd party offer? The easy, legal answer is an offer made by an unrelated 3rd party purchaser who purchases the property for valuable consideration that is inducement for the entering into a contract without fraud or deception.

I recently had a tenant ask me to analyze a situation relating to a ROFR. The tenant had completed its 10 year initial lease term and the 1st year of its 5 year renewal term. There were 4 years remaining on the lease. The landlord had received an unsolicited offer to sell the building from an unrelated 3rd party. Though the landlord had not intended to sell, landlord was inclined to accept and forwarded the offer on to tenant with a note saying that landlord would pass on the offer if tenant would agree to purchase the property at the end of the lease term for a price that was $200,000 less than the current offer.

Needless to say, the tenant was confused. To make it more confusing, the offer was full of contingencies. The first major contingency was that the buyer had to get 3 adjacent properties under contract and then simultaneously close with this property. So, the contract was intended to be a property assemblage and this was the 1st of 4 parcels that the buyer had made an offer on. The other major contingency was re-zoning and site plan of the assembled property. However, the contract did not describe the intended use or the required approvals. My primary question was whether we even had a bona fide contract that triggered the ROFR.

The biggest problem was that tenant’s ROFR required that tenant respond in 15 days and close within 45 days thereafter. Given that the buyer’s contingencies had not yet been satisfied and that there was no possible way that they could be satisfied before tenant would be obligated to exercise the ROFR and then close, the contract was not yet ripe and therefore, not a bona fide contract for which tenant’s ROFR had been triggered. Until the buyer satisfied or waived the contingencies, the buyer had not obligation to close and therefore, the buyer was not a bona fide purchaser.

Further, landlord’s action in advising the tenant that it would reject the offer and enter into a different purchase agreement with tenant indicated that landlord had not accepted the contract and was using it as a method to force tenant to purchase the property using the ROFR. Landlord wanted the best of both worlds – 4 more years of cash flow via rent, and a guaranteed buy out at the end of the term. Landlord could not get either of these through the contingent offer but had to accept the offer when tenant rejected the offer and put landlord on notice that the offer was not bona fide. This could come down to a shoving match if and when the proposed buyer satisfies its contingencies and attempts to close.

Lesson learned? Make sure you understand the triggering event of the ROFR before signing a lease whether you are the landlord or the tenant. Any ambiguity in an offer can be exploited and delay the exit strategy for one side or the other.

Usually, at the end of every year or at the beginning of the new year, landlords send out their “CAM Notices” or “Rent Notices” in which they inform commercial  tenants of their monthly rent for the upcoming year. Depending upon what type of commercial lease a tenant might have, one or more factors  may cause the rent to increase in the new year. Tenants should spend time examining these notices to ensure that the information contained in them is correct and consistent with the lease they entered into and perhaps modified afterward.

Some leases do not directly pass on any of the operating costs of the property. This type of lease is called a “gross lease”.  Notices received under gross leases may only detail an increase in the rent because of a stated increase or fixed percentage increase in the rent provided for in the lease at the outset when it was signed, or alternatively refer to an index, such as the Consumer Price Index as a basis for any rent adjustments in the coming year.

Under a “modified gross lease”, the landlord passes on some but not all of the operating costs of the property to the tenant, such as real estate taxes and insurance. In addition to containing the information noted above, when there is a modified gross lease, the landlord’s notice will probably state the anticipated cost of the passed through expense for  the coming year, and  the tenant’s monthly (i.e., 1/12th)  share of the these passed through expenses based upon the tenant’s pro-rata percentage occupancy of the building.

When all of the operating expenses for the property are passed on to the tenant by the landlord under a lease, the lease is typically referred to as a “net lease” or “triple net” lease. In this instance the rent increase or CAM notice is more elaborate. As before, a portion of the notice details the basis for any increase in the monthly rent due to a  preset rent increase in the lease or an external  formula  for adjusting the rent,  but now the portion of the notice dealing with the operating expenses of the property passed through to the tenant might expectedly contain more information than if the notice related to a modified gross lease.

No matter what the lease type, the tenant should carefully compare the information contained in the landlord’s notice to the lease (e.g., pro-rata percentage of building, basis for base rent increases in the lease independent of any pass through, specifics of the passed through expense, if any). If the rent increase was based upon a CPI increase, the back up for the CPI based increase should be provided.  In the case of both a modified gross lease and a net lease the tenant may want to ask the landlord for copies of the 2017 real estate tax bill and the 2017 insurance premium bill so that the tenant can compare those actual costs to the projected 2018 cost. If the landlord’s notice pertains to a net lease, the tenant may also want to ask for a copy of the property’s operating expense statement for 2017 to compare it to the projected operating expenses for 2018.

This coming year, tenants should also carefully review the monthly sales tax amount that they are being charged. Beginning on January 1, 2018 the state level sales tax will be reduced from 6% to 5.8 % for rental payments attributable to a tenant’s occupancy of a premises during January, 2018 and after.

Certain counties, such as Miami-Dade County, Florida impose a local option surtax on commercial or short term rents. . The recent change in the state level sales tax has no effect on local surtaxes. Thus, in Miami-Dade County, FL. the sales tax rate on monthly commercial rents will be 6.8% instead of the 7% that was previously charged.

The year is young and there is still time to save money by critically reviewing the landlord’s recent rent or CAM notice

Sometimes, when you think you’ve won, you’ve really lost. In my most recent case, I was very successful in working out a bad lease for a client.  Prior to coming to me, the client had been through several rent deferments.  The deferments had come due and the landlord was unwilling to give any further accommodations.  After months of negotiation, the tenant thought she had the parameters of a lease extension.  But, there were numerous open issues and financial terms to address.

After discussing the client’s financial position, I was able to negotiate a write-off of the deferred rent, over $300,000, and a tenant improvement allowance to modernize the space in exchange for only a 3 year extension of the lease and a slower increase in the rent. Only the TI would be guaranteed.  These negotiations took over 2 months.  We determined that the tenant did have an A/R balance of under $20,000 which would have to be paid as a condition of the new lease.  The client assured that the could make this payment and could fund any tenant improvements in excess of the TI allowance.  The tenant signed the new lease in early September.  We all felt like this was a win – the landlord, tenant and I.

After Hurricane Irma, I called to check on the client to make sure everything was ok as I had not received the fully executed lease back from the landlord. She complained that the landlord was stalling on signing the lease and therefore, she couldn’t start the TI.  Before I volunteered to check on this, I probed.  She complained that business loss was significant due to the hurricane and its aftermath and she was not able to make the promised payment and that landlord was being unreasonable, refusing to work with her.  Alarms started going off all around me.  This money should have been available before the hurricane at the time the lease was signed.  She started pointing fingers at everyone again – the landlord, the property manager, her partner, FPL, me.  Clearly, the issue was, is and always has been the tenant’s inability to pay the rent and other obligations prior to and since the execution of the modification.

What appeared to be a big, hard fought win looks to be turning into a loss. Could this have been avoided?  I don’t think so because the tenant, the client, has not been honest.  Mostly, she has not been honest with herself about what she could and could not afford.  But she also wasn’t honest with me and therefore, I could not properly advise her or handle the negotiations.  Expectations were set based on false premises and when we thought we had a win, we really lost.  Any bargaining position we might have had was lost as soon as she signed the lease.  If the tenant did not have the financial wherewithal to meet its obligations, either under the prior lease terms or under the renegotiated lease terms, she should have never signed the new lease.  As a result, we have lost the thrill of victory and now feel the agony of defeat.

We have all been there. We have negotiated deals where we’ve poured our blood, sweat and tears.  We have pushed and been pushed.  Our clients have struggled with decisions and asked for “one more concession”.  That concession causes the other side to ask for one more concession.  But finally, the deal is done.  The contract or lease is agreeable to both sides.  And then, the other side, the big corporation, has to “send it to committee” for approval.  The approval comes back with the deal killer term.

That is where I am today. My tenant client had run out of rent deferrals in a shopping center lease.  We negotiated a lease modification and extension where the deferred rent would be forgiven, landlord would provide a significant TI allowance and the base rent would be adjusted down to something the tenant could afford.  In exchange, we agreed to an extension of the term and to percentage rent.  We haggled for 2 1/2 months over every paragraph, sentence, clause and term.  In fact, my client had negotiated the modification for over 2 months before retaining me.  The landlord had geared up for eviction more than once.

But we crossed the finish line and agreed to terms. I requested execution copies.  But first, landlord had to get “committee approval”.  4 days later the phone call came.  The landlord, a well known mall developer and operator, had reviewed the terms of the modification in committee and made an adjustment.  Committee decided that the breakpoint for the percentage rent had to be adjusted downward to the last 12 months of tenants gross sales.  Of course that was unacceptable.  My client has been operating at a loss at the current level of sales which is why we she had been on a deferred rent program and why we were modifying the lease.  If the remodel were successful in achieving an increase in sales as we hoped, she could not achieve profitability.  And, the landlord would not allow for the break point to increase despite the fact that base rent would increase during the term.  Landlord was setting tenant up for failure.  They weren’t even considering tenant’s equity injection for its share of the cost of the TI.

If landlord continues to refuse to modify its position on this point, tenant will be forced to move out of the mall or to simply close. Where we thought we had a final agreement, one we thought was ready to go to signature, we only had a term sheet.  This “term sheet” cost the client nearly 5 months of time, time which could have been spent locating another space outside the mall, not to mention legal fees and design fees for the new remodeled space.  The client is beyond frustrated and it is difficult to explain how a major corporation can act this way and in cases like these, it is also very difficult to manage expectations.

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