[DIRT] DD 2/28/06 LL Cannot Automatically Add Management Fee to CAM

Daily Development for Tuesday, February 28, 2006
by: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri


LANDLORD/TENANT; COMMERCIAL; CAM CHARGES:    Where not expressly provided for in the lease, lessee has no obligation to pay landlord’s  management fee as part of the operating expenses of the building and general language in an estoppel certificate cannot be used to make changes to a lease to impose this obligation.. 

K’s Merchandise Mart, Inc. v. Northgate Limited Partnership, 835 N.E.2d 965 (Ill. App. Ct. 2005). 

K’s Merchandise Mart, Inc. (“Lessee”) succeeded a  previous tenant’s interest at a bankruptcy sale in 1998.  The prior tenant had negotiated an agreement whereby lessor would make certain improvements and lessee would make additional payments, including a pro rata share of maintenance expenses.   The improvements were completed shortly after Lessee acquired the property, and Lessee was billed for its share of the common area maintenance expenses.  Lessee’s pro-rata share for the 66 days it had been the lessee amounted to slightly more than $300, which it promptly paid.

Lessee’s lease did not mention a management fee as part of the maintenance expenses.  The leases of other tenants in the center did mention such a fee.   Lessor was charging 5% of gross receipts as a management fee.  Typically this amounted to 40% or more of the gross maintenance costs.  The fee was paid to Lessor. 

Although Lessee received monthly statements of for maintenance charges  after assuming the lease, these statements did not reveal that the charges included a maintenance fee.  In October, 1999, however, Lessee did get an annual reconciliation that showed a maintenance fee was included in the charges.  Lessee’s share was only for 66 days, and the total charge it was required to pay to reconcile was $300. 

In January 2000, Northgate Limited Partnership (“Lessor”) purchased the shopping center.  Lessee executed an estoppel certificate as part of the purchase.  The estoppel certificate stated the terms of the lease, including the monthly common-area charges and percentage share of operating expenses.  The estoppel certificate also stated that the landlord was not in default under any provisions.  It did not specifically mention the management fee, but brokers and seller told Lessor that all tenants were paying a 5% of gross management fee. 

Lessee received reconciliations for years 1999 and 2000 in 2000 and 2001 respectively, which it paid.  In July 2001, however, Lessee sent a letter to Lessor objecting to the inclusion of the management fee as part of the common-area maintenance expenses.

 In October 2001, Lessee filed a declaratory judgment action.  The trial court found there was no obligation under the lease to pay a management fee and Lessor appealed.  The Appellate Court of Illinois held that the lease documents did not obligate Lessee to pay a management fee, because the 1997 lease agreement did not specifically refer to such a management fee, instead referring to direct out-of-pocket expenses. 

The court distinguished management fees as additional charges or indirect fees, which are not fixed costs.  It said that it was not appropriate for Lessor to charge these as “costs” of maintenance unless there was a specific agreement.

Lessor alleged that in the estoppel certificate, Lessee agreed to pay the management fee by agreeing to a certain sum which included a line item for management expenses. The court held that an adverse party may not use an estoppel certificate in order to make undisclosed changes to the lease.  The bill Lessee did receive did not explain how the management fee was computed, nor did the monthly billings mention any specific management fee.  Additionally, the court was unwilling to read the estoppel certificate as requiring payment of a management fee of approximately $2,600 when the estimated monthly billings stated the management fee of approximately $900. 

Thus, the court held that the estoppel certificate did not expressly address the management fees and there was not a course of performance which would be sufficient to charge Lessee with knowledge of the management fee.  Accordingly, the court affirmed the trial court’s grant of declaratory judgment in favor of Lessee.

Comment: Most often, tenants with bargaining power protect themselves against excessive CAM charges by setting caps on their liability and by very very detailed provisions describing what is permitted as CAM and what isn’t.  But detail often isn’t enough, as the types of charges that landlords wish to include in CAM are of infinite variety, and continually evolve.  But there are few appellate cases, as real “players” usually are able to negotiate a settlement of differences in these issues.

Here, there were two obstacles to negotiation.  First, the amount of the fee was quite substantial, and second, the Lessor had likely computed anticipated revenue from the fees in its financial projections when it purchased the center.  Thus, neither side was in a position to give up very much for a compromise.  So, of course, by litigating the matter, they each spent a great deal more than they would have saved.   Make sense?  Certainly does to the litigators.

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