| According to Landlords, "A CAM audit is about as welcome as a trip to the dentist" |
Over the last several years, tenants have become increasingly aware of the high cost of CAM and the even higher cost of doing nothing about it. A retailer that does not review its occupancy costs and attempt professionally to recover overcharges is not doing its employees or its shareholders any good. Unfortunately, landlords don't always see it that way. Case in point: the March 2000 edition of Shopping Center Management Insider states bluntly, "A CAM audit is about as welcome as a trip to the dentist." It then suggests that one way to discourage retailers is to tell them they will be billed for the costs of the audit. "If your lease does let you bill the tenant, you may be able to persuade it to cancel a pending audit by reminding it before it starts the audit that it will have to reimburse you for these costs . . . And if the tenant still want to go through with the audit, even after you remind it of the costs involved, it may cut the audit short and be discouraged from requesting future audits when it sees how much it has to spend to audit your center . . . "
P.S. We had to laugh when it suggested that expenses would include 25 cents per page copying, $40 an hour personnel, and on top of that, a $40 per request charge. Wait till they add an administrative fee!
Several years ago, perhaps mis-guided by some bad legal advice, landlords started tacking on a "management fee" to CAM, in addition to line-item management charges (ie: for the mall manager, his/her staff, the operations manager, etc.). The fact is that, unless specifically permitted by the lease, these management fees (usually in the range of 3-5% of gross revenue) cannot be passed on to the tenant regardless of whether the landlord pays a management fee to the managing agent. More on this on the Retaillaw.com Legal Page.
| "An Audit is a terrible thing to waste!" |
Believe it or not, management fees are frequently hidden within the CAM statement. Short of calling the landlord ("hey, what's in this bill?") We suggest you check whether the administrative charge is actually less than the fixed percentage (usually 15 or 18 percent), of operating costs. If the landlord has "under charged" the administrative charge, it usually means that there is a hidden management fee. (We find it amusing that while most landlords have no problem secretly throwing in a management fee, many restrain themselves from tacking an administrative charge onto the management fee (but it's been done!).
All too often, tenants discover too late that they’ve given up their right to audit. Here are some steps you can take to preserve this all-important right:
When leasing, watch out for limitations. Don’t agree to "account stated" provisions that are unreasonably short, for example, less than one year. Optimally, you should agree to no less than three years. Also, be careful of provisions limiting the time in which you can audit; some courts may treat these provisions the same as an "account stated" limit.
Don’t agree that you will not use a "contingent fee" auditor unless you plan to do the audits yourself or pay a fee. Similarly, don’t agree to have a "CPA" only perform the audit. Landlords like these provisions because they know that the best auditors in the business usually work on a contingent fee basis (and retailers usually don’t want to pay up-front fees).
Finally, if your lease contains a limitation on your time to audit or an account stated provision and you are unable to complete your audit within that time, at a minimum, send the landlord a letter objecting to the reconciliation upon receipt. You can make that objection even stronger if you point out areas to which you object, for example, the landlord has failed to provide a tenant roster or a breakdown of management charges with the reconciliation.
If you know that an audit may take some time to conduct and settle, you may want to obtain a "tolling and forbearance" agreement, which stops ("tolls") the statute of limitations and prohibits the parties from commencing a lawsuit or other proceeding. The tolling agreement should begin at least on the date that you first requested the audit and give the parties at least one year for its completion.
Download a sample tolling agreement here.
No retailer can afford to overpay its landlord. If you are concerned about your occupancy costs, please click the link to Total Occupancy Solutions, the first and only CAM audit company that combines legal and retail expertise under one roof!
