By Ben Carrasco, litigation associate, Smith, Robertson, Elliott & Douglas, LLP, Austin, Texas,
Perhaps the costliest and most contentious landlord-tenant disputes center around Common Area Maintenance or “CAM” costs — the operating costs for the shopping center, taxes, and utilities. These costs are calculated by the landlord and assessed against each tenant based upon a tenant’s pro rata share of the leasable square footage of the shopping center. Because the landlord has exclusive access and control over the books and records relied upon to generate a tenant’s CAM costs, tenants must rely on the competence and good faith of the landlord to generate an accurate calculation. CAM calculations are frequently rife with errors, however. As a result, cost-conscious tenants are no longer reflexively paying CAM bills with minimal scrutiny; instead, they are pushing back against suspect charges and demanding greater accountability and transparency from landlords, whether through audits or other remedies. This dynamic has elevated the importance of determining what rights are available to a tenant seeking to verify the accuracy of CAM charges.
The most powerful tool a tenant can deploy to verify the accuracy of CAM charges is an audit right expressly granted by a lease. An audit allows a tenant to conduct a comprehensive analysis of the landlord’s books and records to ensure the amount charged for CAM costs is correct. But not every lease contains an express audit right. What recourse, then, is available to a tenant seeking to verify the accuracy of CAM charges in the absence of an express audit right?
Most courts imply in every contract a covenant of good faith and fair dealing that imposes a duty upon the parties to cooperate with each other so that each may obtain the full benefit of performance under the contract. This covenant allows a court to imply terms in a contract that are necessary to effectuate the contract’s express terms. Practically speaking, this means that courts will infer a general right by the tenant to verify the accuracy of CAM charges. However, there is less of a consensus over whether a right to conduct an audit can be implied in a lease agreement that otherwise lacks an audit provision. In other words, a general implied right to verify the accuracy of CAM charges does not necessarily embrace a concomitant right to audit the landlord’s records. Notably, some courts have implied audit rights in lease agreements, reasoning that such rights provide the best practical mechanism for verifying CAM charges, while other courts have held that implying such a right imposes duties on the landlord that are too intrusive and far afield of the lease’s express provisions.
Two cases illustrate this tension. In Upper Krust South, Inc. v. School Employees Retirement Board of Ohio, a commercial tenant requested a judicial determination that it was “entitled to audited statements setting forth…the expenses for which [tenant] is obligated…” in connection with a CAM dispute. (Mar. 29, 1996), Montgomery App. Nos. 15349/15399, Unreported, 1996 WL 139406 at *1. While the lease did not contain an express audit right, the court nevertheless determined that creating such a right was a practical necessity to facilitate the parties’ compliance with their respective contractual duties. The court explained that “‘[a] contract includes not only the terms set forth in express words, but by implication all the provisions indispensable to effectuate the intentions of the parties…’” Id. at *12 citing Williams v. Goodyear Aircraft Corp. (1948), 84 Ohio App. 113, 118. Requiring the landlord provide the tenant with an audited statement of CAM expenses enabled the tenant to “comply with its contractual obligation” to pay CAM charges and was therefore not “contrary to the intentions of the parties to the contract,” the court concluded. Id. at *12.
By contrast, in McClain v. Octagon Plaza, LLC, a California court held that the implied covenant of good faith and fair dealing did not obligate a landlord to allow a tenant to audit the landlord’s records to verify CAM charges. 159 Cal. App. 4th 784, 71 Cal. Rptr. 3d 885 (2008). In McClain, the lease did not confer an express audit right, instead providing only that the tenant was entitled to a “reasonably detailed statement” of her share of common expenses. The court noted that the implied covenant of good faith and fear dealing imposes “not only upon each contracting party the duty to refrain from doing anything which would render performance of the contract impossible by any act of its own, but also the duty to do everything that the contract presupposes that he will do to accomplish its purpose.’” Id. at 806, quoting Harm v. Frasher (1960) 181 Cal. App. 2d. 405, 417, 5 Cal.Rptr. 367. Accordingly, the court held that because the tenant “is entitled to verify” that the purported CAM expenses were, in fact, incurred, landlord “must provide [tenant] with the documents it used in preparing the ‘reasonably detailed statement’” of CAM expenses required under the lease. Id. at 806. However, the court stopped short of authorizing tenant’s requested audit, reasoning that such a request “exceeds the access to [landlord’s] documents authorized by the principles we have articulated.” Id. at 808.
The upshot of these cases is that tenants should take solace in knowing that they have a legal right to know the basis for CAM charges. Moreover, depending on the jurisdiction, a court may determine that a tenant has a right to audit such charges even where the lease does not contain an express audit right. In seeking to convince a court to imply such a right, tenants must emphasize that an audit is the fairest, most practical method for verifying CAM charges. Relying on the landlord to provide supporting documentation for CAM charges with no oversight — no obligation to “open the books” to outside scrutiny — leaves too much potential for mischief and manipulation of the figures. When a tenant encounters resistance from a landlord to disclose the basis for CAM charges, tenants should carefully review their leases and determine what, if any, rights are available to audit the landlord’s records and, importantly, when those rights need to be asserted. If the lease fails to provide audit rights but does obligate the landlord to provide a “detailed statement” or any other supporting documentation concerning CAM charges, tenants must evaluate whether the landlord has met this burden. Finally, tenants should consider consulting an attorney to determine how courts in their jurisdiction enforce implied covenants in the context of lease disputes. Being armed with this information — and signaling to the landlord your awareness of your rights — is the first step toward preventing litigation.