Daily Development for Tuesday, March 20, 2001

LANDLORD/TENANT; RENT; ALLOCATION: Shopping Center tenants may designate lease payments they make as rent, rather than as common area maintenance (CAM) payments.

Roseburg Investments v. House of Fabrics, 955 P.2d 1228 (Or. App. 2000).

Plaintiff's predecessor leased to defendants premises located in the Garden Valley Shopping Center. The written lease required defendants to make monthly rent and monthly common area maintenance (CAM) expense payments. According to the lease, CAM charges reflected "on a pro rata basis the reasonable costs of operating and maintaining the common areas" of the shopping center. The lease required defendants to pay estimated CAM charges each month in advance and, at the end of each year, plaintiff was required to furnish defendants with a written statement itemizing the actual CAM costs for the shopping center and defendants' pro rata share of those costs. If defendants overpaid their pro rata share on an annual basis, the lease obligated plaintiff to refund the difference; alternatively, if defendants underpaid, they were obligated to make up the difference. The lease afforded defendants the "right to audit [plaintiff's] books and records regarding common area charges."

The defendants advised plaintiff in a letter that their auditors had determined that defendants were overcharged $6,161 in CAM expenses.

Defendants requested a refund or credit for the alleged overpayment.

Plaintiff did not respond to defendants' request.

Defendants took the position that they had not been reimbursed for the alleged CAM overpayment and, despite plaintiff's warning, withheld an equal amount from their total payment each month from October 1997 through January 1998, for a total of $6,161. During those months, defendants' payment was in an amount not less than the "minimum rent"

required by the lease. After January 1998, defendants resumed making the full monthly payments to plaintiff. Plaintiff then notified defendants that they were "in default due to their failure to pay their rent when due and subsequently filed this action.

The court found that each of the monthly payments from October 1997 through January 1998 exceeded the amount of "minimum rent required by the lease"; it also concluded that plaintiff was required to apply those payments to rentrather than CAMbecause defendants' conduct made clear that they intended to apply their "short" payments to rent. The trial court therefore concluded that defendants were not in default due to nonpayment of rent and entered judgment in favor of defendants.

The court of appeals held that the tenants were entitled to designate the lease payments they made as rent, rather than as common area maintenance (CAM) payments pursuant to shopping center lease, where tenants withheld amounts that were equal to the alleged CAM overcharges that landlord had refused to refund to tenants.

Comment 1: Is it possible, despite the warnings in virtually every practitioner's guide to drafting leases, that the landlord did not provide that the CAM charges were payable as "additional" rent, to be added to the "base rent" in order to determine the total amount of rent? One might draw that conclusion from this case, but the explanation for the result here may lie simply in unfortunate phrasing of the issues by the landlord's trial counsel, who, of course, had not read the treatises.

Comment 2: Because most people do follow the advice set forth in Comment 1, and denominate as "rent" all payments tenant must make under the lease, it may be moot in most cases whether the tenant is entitled to determine whether payments constitute "rent" or CAM reimbursement. But the issue may arise in other contexts, and therefore the case is of some significance in permitting the landlord to designate how the payments must be allocated.

The landlord argued that a creditor has the right to allocate payments to one of several debts owed by the party making the payment. But the court here takes the position that where the tenant stipulates how the payment must be allocated, the landlord is bound (assuming that the lease does not already reserve an allocation right to one of the parties.)

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