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.

There are many pre-closing costs incurred in residential real estate closings. These costs are generally fronted by the title company or the buyer’s attorney.  If all goes well and closing occurs, the costs are reimbursed.  However, too often, something goes wrong and the closing doesn’t happen.  We, and I include myself and my firm in this category, closing agents are often stuck with these unreimbursed costs.  Hopefully, our buyer will find another house and we’ll have an opportunity for reimbursement later.  That is not always the case.  Fortunately, many of these pre-closing expenses are small.  One potentially large expense is the estoppel letter from the condominium association or HOA.

Condo and HOA estoppel letters are important parts of residential closings. These tell us whether the seller is current in payment of assessments of if there is a collection action pending that has not yet shown in the title search.  The estoppel confirms the amount of the assessments and how much has been paid to date so that proper pro-rations can be made on the closing statement.  And, hopefully, the estoppel will provide other information, like whether the association has a right of refusal or other approval or purchase rights.

For the work of preparing and providing an estoppel letter, the association or management company usually charges a fee. This fee is unregulated in Florida and we see fees today ranging from as low as $100 to over $450 or even higher if a rush is required.  These fees almost always have to be paid up front.  “Rush” cam mean as much as 2 weeks from the date of request.

HB 483 and its companion in the Senate, SB 398, propose to cap estoppel fees, promulgate a from estoppel which would contain mandatory, standard information and set deadlines for providing completed estoppels to the requestor. In addition, the fees would be payable at closing and out of closing proceeds, relieving the burden from the closing agent.

The “Home Tax Bill” would amend F.S. Sections 718.116, 719.108 and 720.3088, the Condominium, Cooperative and Homeowner Association Acts, respectively. The Act would shorten the time period that Associations have to provide estoppels from 15 days to 10 business days, a minor adjustment.  More importantly, the Act creates a mandatory estoppel form which contains the information an association must provide in its estoppel.  This would include whether there are any existing rules violations pertaining to the unit, the association’s approval requirements for sale or lease of the unit, what utilities are included in the payment of assessments, the parking space and storage unit assigned to the unit, the regular periodic assessment and date paid through and the date the next installment due, if delinquent, the name and contact of the attorney, itemized list of all other assessments and capital contributions due and whether there are any rights of refusals.  The cost of estoppels would be capes at $200 for non-delinquent units, plus $100 for “rush” requests and plus $200 for delinquent units.

Community association groups and attorneys representing community associations oppose the Act arguing that is places too great a burden on associations and that the cost of unpaid estoppels would be passed on to unit owners. These arguments are weak.  For associations which are managed by professional, paid managers or management companies, estoppel information is or should be readily available, regardless of how the manager is staffed.  In fact, most management companies have employees who are dedicated exclusively to providing estoppels.  Further, a large percentage of the information that would be required on the new form is in fact, form language.  The financial information is the same information that is provided today.  There is no real extra burden.  Large property management companies quietly state that estoppel departments are a profit center to their business.  Their associations won’t suffer.  Self-managed associations are generally small and don’t get a large number of requests, certainly, not at one time.  For the few that they do every year, the timing requirements won’t put these associations out any more than they already are.

The risk of unpaid fees is not a real risk either. The Act provides that the owner of the unit is ultimately responsible for the fee.  If it remains unpaid for any reason, the association may collect it as an unpaid assessment.  That means the association may lien and ultimately foreclose the unit if necessary.

The Act brings fairness in a business transaction that was one sided in favor of property managers. Community associations have not really benefitted from estoppel fees and should not oppose the Act.  This is not the first time this legislation has been proposed.  Community associations should join the Florida Association of Realtors in supporting it as unit closings will ultimately go faster and smoother.

00169124

        The Florida Legislature is considering legislation which would require that sellers of condominiums and houses within property owners associations bear the cost of estoppel letters in pending sale transactions. The practical effect of this proposal is that title companies and law firms providing title insurance would no longer advance the cost of estoppel letters and condominium and property associations will have to wait until closing to get paid for this service.  The proposed legislation HB 203 and its companion bill, S 722, would amend F.S. Sections 718.1161, 719.168 and 770.3085.

         If passed, the law would require that estoppel certificates be delivered electronically and that they include certain specific information and be effective for at least 35 days. The fee for estoppel letters would be capped at $200 if no delinquency exists on the unit, plus $100 for an expedited response and an additional $200 if a delinquency does exist on the unit.  The estoppel must be provided within 10 business days of request.

         Associations argue that the proposed law will unduly burden associations and their residents because the cap on the fee is too low and the excess cost will be passed on to the residents. They further argue that where the case is complicated, the time involved to prepare the estoppel will cause a bigger loss to the association.  These arguments are without merit.  In communities that are professionally managed, the fees charged for preparing estoppel letters are a profit center to the manager.  The records are computerized and a book keeping clerk can access the information in a matter of seconds.  In fact, large communities often have a person on staff whose sole responsibility it to prepare estoppel letters.  Where the case is complex, the proposed law provides for an increased fee.  But again, a professionally managed community will have little to no difficulty obtaining this information.  Or, the law firm handling a lien foreclosure or collection should be able to prepare an estoppel quickly and without effort. And, to the extent that there is a “loss” on an occasional file, the majority of estoppel requests should be handled at profit levels so as to more than offset these small losses.

         As to smaller and self-managed communities, these associations don’t receive high volumes of estoppel requests and they don’t often pay a 3rd party to process the requests.  Therefore, there is usually no loss to assess to other owners.

         Associations also fear that if the transaction doesn’t close, they won’t get paid. The proposed law provides that payment is to occur when the unit closes.  So, the next time there is a request for an estoppel, the prior fee should be included on the estoppel as an outstanding payment owed.  The association has a built-in mechanism to assure that it will get paid.  Contrast this with a title company’s ability to recover.  Under current practice, an association requires that the fee be paid up front before it will issue the estoppel.  Most of the time, the title company will advance this cost.  If the closing does not occur, there is not guarantee that the title company will be selected as the title company for buyer’s next deal (or it is Palm Beach County, the next time seller sells the property).  In these cases, most times the title company is forced to write off the loss.  HB 203 will eliminate this loss.

         If this legislation is enacted, the average consumer probably won’t notice anything. A shift of $200 from one side of the closing statement to the other is hardly anything most people would notice.  What could be interesting, however, is the battle among lobbyists that is forthcoming.  Condominium association and property association lobbyists v. real estate and title industry lobbyists – Goliath v. Goliath – which might result in a stalemate.

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