San Diego Business Lawyer Blog

Common Area Expenses (or CAM expenses) are nothing new in the commercial leasing business. However, new business owners are often caught off guard by the thought of the additional expense that sometimes is as high as the base rent itself, especially where there is so little control over how the expenses are managed. Leases that require tenants to pay common area expenses (including property taxes and insurance) are called triple net leases. It is common these days for landlords to pass on every imaginable expense to its tenants. So long as the landlord is passing on legitimate expenses that are necessary for the operation and maintenance of the common areas, there is nothing inherently wrong with the practice. However, prospective tenants should work closely with their attorney to carefully review the proposed lease terms to ensure they have a complete picture of the potential liability and that the landlord isn't using the CAM charges as an additional source of revenue. Ideally, tenants will negotiate for a gross lease that is inclusive of all landlord expenses. However, in most cases negotiating for a gross lease is difficult (if not impossible). Where a net lease is your only option, the following is a list of important considerations:

Pro Rata Share: A tenant's pro rata share of common area expenses should be determined based on the tenant's leased square footage compared to the commercial property's gross leasable space, not "leased" space. In other words, the pro rata share is determined based on 100% occupancy. Landlords often seek to defer costs associated with empty space and will try and include lease language that calls for CAM charges to be calculated based on the square footage of "leased" space rather than "leasable" space. Tenants should seek to amend such language so that the landlord absorbs the expenses associated with empty space.

Audit Rights: Tenants should try and negotiate for the right, upon reasonable notice, to audit the landlord's accounting records. Such clauses are common in commercial leases and allow tenants to ensure that the common area expenses are calculated correctly. Look closely at the lease language as these clauses typically set forth specific procedures for examination of records and for resolution of disputes. Sometimes leases limit the frequency of tenant audits. The more often you are allowed to audit, the better. At the very least, tenants should have the right to audit accounting records once a year within six months of reconciliation (the time landlords reconcile actual expenses with estimated expenses).

Management Fees: Management fees are common, especially in the retail setting. The practice is prevalent and prospective tenants should ensure that the lease clearly defines what the management fees are and how they will be calculated. Management fees should not exceed three percent of the property's gross receipts, and shouldn't include expenses for off-site personnel and overhead. In some cases, landlords seek both administrative and management fees. While this may be appropriate in some circumstances (i.e. landlord hires a separate management company to manage the property), it's important to clearly understand exactly how these fees are delineated and to make sure that the landlord isn't double dipping. Try and negotiate for limits on management fees. 

Clearly Defined Expenses: Ensure that the common area expenses are clearly defined in the lease. Vague and ambiguous language that doesn't spell out precisely what expenses will be included in CAMs leave tenants open to excess costs.

Continue reading "Understanding Your Lease - Common Area Expenses" »

As the San Diego commercial real estate market continues to struggle, foreclosures are becoming more and more common.  The prevailing wisdom is that it's going to get worse before it gets better.  While this writer cautiously takes a more optimistic view, there can be little doubt that many San Diego businesses are being and will be confronted with landlord foreclosures.  Businesses invest more than just lease payments in the premises they occupy.  They make tenant improvements, invest in advertisements and marketing materials using the premises address, build customer loyalty and benefit from a well known and popular location.  Under these circumstances, being forced out as a result of a landlord's default would be disastrous.
 
So what does happen to a business when a landlord defaults on its loan?  The answer depends on the terms of the lease, when it was executed and whether or not it was recorded.  Senior commercial leases will generally survive foreclosure sales, especially where the commercial lease is recorded prior to the recordation of the third party encumbrance.  Tenant possession of the premises may also serve as constructive notice of the senior lease to third party encumbrancers.  However, where a trust deed or other encumbrance is recorded prior to the execution of the lease, the lease is subordinate to the trust deed.  In such circumstances, a foreclosure will extinguish the lease.  A foreclosure purchaser may then evict the tenant as an unlawful occupant.
 
Experienced commercial landlords and tenants, savvy business owners and those represented by commercial lease attorneys look to address these potential consequences before entering into long term leases.  Whatever the terms, it is sound business practice to record all leases including amendments and other related instruments.  If the parties are concerned with confidential terms, they may record a "memorandum of lease" which identifies the unrecorded lease, the parties, the property and the lease term.

Continue reading "Understanding Your Lease - What Happens to Your San Diego Business After Landlord Foreclosure?" »

Commercial leases often appear daunting, especially to new and growing San Diego businesses. After negotiating the rent, business owners often feel they have little choice but to accept the remaining terms if they want to move forward. It is always advisable to consult with a commercial lease lawyer, but the thought of additional costs turn many away from this option. "Understanding Your Lease" is a series of articles designed to highlight important commercial leasing issues. The articles are intended to arm business owners with the ABCs of "commercial leasing", and are not intended as a substitute for professional negotiation. Most commercial leases are triple net leases. Along with the base rent, tenants are required to pay a pro rata share of the common area maintenance expenses (CAM expenses). The scope of these expenses varies from lease to lease, but is most often inclusive of every imaginable cost. See Understanding Your Lease - Common Area Expenses. In this article we briefly summarize the type of expenses included. It's important to review your lease and make sure you know what the CAM expenses are.

Common area expenses typically include: repair and maintenance of the property's common areas; landscaping; exterior painting; parking lot paving, resurfacing, painting and lighting; roofing; repair and maintenance of central plumbing, electrical, sewage and HVAC systems; other repair and maintenance expenses relating to the property's common areas including renovation and redesign expenses; utility expenses related to the common areas; advertising and promotional expenses incurred by landlords; security systems and on-site personnel; permits, taxes, insurance and legal costs; and management and administrative expenses including the salaries of management personnel. On top of these expenses, tenants are required to pay all expenses directly related to the leased space including utilities, repair and maintenance of electrical, plumbing and HVAC systems, compliance with government regulation such as the American with Disabilities Act and are required to maintain a minimum level of general liability insurance.

Common areas typically include parking lots, landscaping, hallways, elevators and stairwells, lobbies, public restrooms, on-site management offices and other public areas. Ask to see CAM histories to help you get a better picture of what your future expenses will look like, and ask about anticipated renovations. These costs can be significant and you'll want to know what's on the horizon. Finally, management and administrative costs can be profit centers for landlords, particularly where both management and administrative costs are sought. Be careful that your landlord isn't double dipping. Work closely with your attorney to reduce uncertainty.