Management Fees: Make Sure Your Lease Is Clear

In Clear Lake Center., L.P. v. Garden Ridge, L.P., 416 S.W.3d 527 (Tex. App. 2013), a tenant, alleged that its landlord breached its lease by charging the tenant for impermissible management fees related to areas other than the common areas described in the lease. Section 6.3 of the lease provided:

Landlord shall operate, manage and maintain the Common Area, the manner of operation, management and maintenance and the expenditures therefor to be in the sole discretion of Landlord, provided such operation, management and maintenance shall be comparable to similar shopping centers in Harris County, Texas. Landlord shall have the right to select a person to maintain and operate any of the Common Area if at any time Landlord determines that the best interests of the Shopping Center will be served by having any of the Common Area maintained and operated by that person.

Id. at 532.

Section 6.4 of the lease further provided:

In addition to rentals and other charges prescribed in this Lease, Tenant shall pay to Landlord Tenant's Share of Common Area Costs (as hereinafter defined). “Common Area Costs,” as used herein, means all sums expended by Landlord during the Lease Term in operating, managing, policing, equipping, lighting, repairing, replacing and maintaining the Common Areas, and an allowance to Landlord for Landlord's supervision of the Common Areas in an amount equal to 7.5% of the total of all Common Area Costs.

Id.

In 2003, Clear Lake purchased the property and charged tenant management fees in addition to the 7.5% supervisory fee. Id. at 533-534. Clear Lake's predecessor, Fiesta Mart, had never charged tenant any management fee since the lease was entered into in 1995. The court held: 1) that the lease authorized the landlord to charge a separate fee, in addition to an “allowance” or “supervisory fee” for the management of the property's common areas; but that 2) the landlord did not have discretion to charge tenant a management fee unrelated to common area maintenance. Id. at 537-538.

The court relied on the landlord's unambiguous authority under the lease “to charge a separate fee, in addition to the 'allowance' or 'supervisory fee,' for the management of the common area.” Id. at 537. The lease provided that the landlord may “'select a person to maintain and operate any of the Common Area' and 'enter into a contract with that person on such terms and conditions … as Landlord deems reasonable and proper, both as to services and as to cost.'” Id. Further, the court found that “[t]he 'allowance' or 'supervisory fee' [was] clearly an additional fee and not duplicative of any other management costs expended by the landlord, which may include costs of another person maintaining the common area.” Id.

As to limiting the ability to charge management fees to the extent related to common area maintenance, the court reasoned that:

The lease unambiguously limit[ed] the allowable fee, however, to sums expended for the management and maintenance of the common area — not the property as a whole. Contrary to Clear Lake's argument, the “sole discretion” phrase in Section 6.3 does not alter the fact that the “expenditures therefor” relate[d] to Clear Lake's duty to “operate, manage and maintain the Common Area.” The “all sums expended” language in Section 6.4 [was] limited to costs for operating, managing, and maintaining (among other things), “the Common Areas.”

Id.

Ambiguous Language

Ambiguous language in a lease regarding the payment of management fees requires court interpretation. Following demand from a landlord that its tenant under a lease for a distribution center property pay management fees as additional rent, the tenant sought declaratory relief. Orgill, Inc. v. Distribution Centers of Am. (WV), LLC, 290 F. Supp. 3d 550, 552 (N.D.W. Va. 2017)

In Orgill, the lease at issue provided that additional rent consisted of “all impositions, taxes, payments or fees in lieu of taxes, insurance premiums, operating charges, costs and expenses which arise or may be contemplated under any provision of [the lease].” Id. at 555. The lease also provided that it was a:

“net-net-net lease” it being understood that the Landlord shall receive the Basic Rent, Additional Rent and all other sum [sic] payable to it pursuant to the terms of this Lease, free and clear of any and all impositions, taxes, liens, charges or expenses of any nature whatsoever in connection with the Landlord's ownership and leasing of the Leased Premises. … Unless caused by the actions of the Landlord, all costs, expenses, and obligations of every kind and nature whatsoever relating to the Leased Premises and the appurtenances thereto … shall be paid by the Tenant.

Id.

The court found the lease language to be ambiguous under West Virginia law, as it was unclear whether the parties intended “additional rent” to include management fees. Id. at 556. Relying on the rules of contract interpretation and extrinsic evidence, the court determined that the parties did not contemplate that “additional rent” would include management fees. Id. at 556-557. The lease provisions did not expressly reference management fees, and while the lease provided examples of additional rent, it did not identify “or even suggest” management fees as being included. Id. at 556. Because the tenant had specifically requested the inclusion of the provision that any cost or expense caused by the actions of landlord would be paid by the landlord, and the landlord did not collect management fees for the first ten years of the lease, the court found that the parties had not contemplated that additional rent was to include management fees. Id. at 557.

Similarly, in Viking Bank v. Firgrove Commons 3, LLC, 334 P.3d 116 (Wash. Ct. App. 2014), the tenant brought a declaratory judgment action against the landlord claiming it was not required to pay management fees under its lease.

Section 3.5 of the lease provided:

All Base Annual Rent payable hereunder shall be paid as “triple net” rent without deduction or offset. It is the intent of the parties, except as is otherwise provided in this Lease, that Base Annual Rent provided to Landlord shall be absolutely net to Landlord, and Tenant shall pay all costs, charges, insurance premiums, taxes, utilities, expenses and prorated share of maintenance for common area CAM Expenses, and assessments of every kind and nature incurred for, against, or in connection with the Ground Leased Premises and Property.

Id. at 120 (internal citations omitted).

“CAM Expenses” were defined in the lease “as the reasonable costs and expenses of maintaining or repairing any entrances to or sidewalks within the development.” Id. at 118.

Here, the landlord hired a property manager who maintained the common areas of the shopping center, negotiated a contract for snow and ice removal for the common areas and performed administrative functions related to tenant leases, including billing for rent, taxes and sewer charges. The property manager's fee, equal to 5% of the tenant's rent, was billed to the tenant in addition to the tenant being billed for its share of common area maintenance and snow removal as CAM Expenses. The tenant refused to pay the property manager's fee, arguing that “the lease does not contemplate management fees because the parties intended the [tenant] to manage its own premises.” Id. at 119.

As in Orgill, the court found that the terms of the lease did not expressly require the tenant to reimburse the landlord for management fees to the extent they related to collecting rent, property taxes, and sewer charges or for any other lease administration activities. Id. at 122. Instead, the tenant was only required to pay for that portion of the management company's fees related to common area maintenance.

According to the court, the lease provided that “tenant must pay only those expenses incurred in connection with the leased property, not expenses incurred in connection with the lease. The management company's collection activities involved expenses in connection with the lease but not the leased property. Therefore, they [were] not within the scope of section 3.5.” Id. at 121. Further, while payment of the section 3.5 expenses was “necessary for the tenant's continued use and occupancy of the leased premises … [and] benefit[ted] the tenant[,] … payment of the expense for collecting rent, taxes, and utility payments [was] not necessary for continued use and occupancy, and did not benefit [the tenant].” Id. Instead, using a management company to collect payments benefitted the landlord only. Also, because section 3.5 required the tenant to pay rent, property taxes and utilities, and to carry insurance and maintain the leased premises, the tenant was contractually obligated “to act as the 'manager' of the leased property. Interpreting section 3.5 as requiring [the tenant] to pay a property management company to duplicate its own management responsibilities would be inconsistent with the other lease provisions.” Id. The court also noted that the landlord “made no effort to allocate a portion of the management company's fee to CAM charges, and instead charged the tenant a percentage of the rent for all management services.” Id. at 122. Accordingly, the tenant “had no obligation to pay that unallocated percentage.” Id.

Analysis

As the cases described in this article demonstrate, there is no standard approach to addressing management fees in a lease. But, one point is a common theme in these cases: Landlords may not be able to rely on vague, general descriptions in “additional rent” provisions as a means to pass management fees on to tenants. Terms like “triple net” and even the listing of several additional rent items like taxes, insurance, “all costs and maintenance expenses,” etc., may not be sufficient to allow a landlord to charge a management fee not otherwise expressly referenced in the lease, and a tenant may not be able to stop paying management fees after months or years of paying such fees. Instead, the parties to a lease should be clear from the outset whether, and to what extent, management fees incurred by the landlord may be passed through to the tenant, as well as what the management fees may or may not include.

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Missy McCoy is an associate of Lewis Rice LLC, practicing in the Real Estate and Corporate Departments. She thanks Kylee Emert, associate of Lewis Rice LLC, for her assistance with this article.