The One Sentence Summary: In successful claim after successful claim, it is the lease language that is most important.

Full Posting:

Every year there are thousands of disputes in which retail tenants claim they are overcharged by owners and operators of shopping centers for CAM expenses, utilities, taxes, marketing fund payments and other charges. The disputes can be for hundreds of dollars or millions of dollars depending on the magnitude of the overcharges, the period over which the overcharges can be collected and the number of leases involved. Some of these disputes are resolved quickly and favorably to tenants, others are dropped, and some result in lawsuits. From a retailer perspective, the overcharge claims that are the greatest success are those that are resolved quickly and for a substantial percentage of what the tenant seeks. The relief can come in the form of cash or other forms of compensation, such as agreements to reduce charges in the future or providing the tenant some other benefit such as closing an underperforming store or extending a lease on favorable terms.

So what are the characteristics of successful tenant claims? Twenty years of representing retailers has shown that the most important characteristic of a successful tenant claim is being able to convince the shopping center owner or operator that the claim has merit (meaning an objective fact finder has a high probability of finding the tenant was overcharged). Even if a tenant claim has merit, a tenant may still have some difficulty resolving a claim if a shopping center owner does not believe a tenant will take action. Under such circumstances action, namely a lawsuit, may be required. The question then becomes what will persuade a court or jury and the issue comes back to what claims have merit.

In evaluating the merits, there are three criteria that come into play. The first and most important is the language of the lease. Does the language support the claim being made by the tenant? The second criteria is whether so-called “extrinsic evidence” supports the position of the tenant regarding the meaning of the lease. Extrinsic evidence is nothing more than information other than the language of the lease itself. The third criteria, once the meaning of the lease is established, is whether there is evidence that the landlord breached the lease.

CRITERIA 1 – THE LANGUAGE OF THE LEASE.

There is no question that the single most important criteria in demonstrating a claim has merit is what the lease says. The ability of a tenant to convince an objective fact finder, or to convince a landlord that an objective fact finder might side with the tenant, will be determined primarily by the tenant’s ability to link its claim to language in the lease. A claim that a tenant is merely overcharged because it is paying more than its “fair share” is not likely to be successful. Rather, a tenant needs to point to lease language that has been violated leading to an overcharge.

In decided case after decided case, what has mattered most is tenant’s ability to link the claim of an overcharge to language in the lease. For example, in Sheplers, Inc. v. Kabuto International (Nevada) Corp., a 1999 decision by a federal district court in Kansas, the dispute focused on whether certain management fees and expenses were properly charged to the tenant as CAM costs. The court rejected the landlord’s argument that the lease permitted it to include in CAM charges any costs associated with managing the shopping center, because the lease specifically stated that common area expenses include “the operating, managing, equipping, lighting, repairing, replacing, and maintaining the common areas.” Therefore, only management costs specifically related to the common areas were properly included in the CAM expenses.

At times, consideration of the language in the lease will involve the application of lease interpretation rules to lease language. The rules of interpretation commonly applied by courts include:

• When the terms of a lease are clear and unambiguous, the intent of the parties should be found within the four corners of the agreement.
• Terms should be given their plain and ordinary meaning.
• Lease provisions should be construed in the context of the entire lease.
• All lease language should be given meaning and effect.
• A practical interpretation should be given to lease language so that the parties’ reasonable expectations are realized.
• And in some states a rule of last resort: Ambiguous language should be construed strictly against the drafter.

Thus, in addition to favorable lease language, the application of a rule of interpretation often makes for a strong claim by a tenant. For instance, the court in Sheplers v. Kabuto emphasized that its interpretation limiting CAM charges to only those expenses related to managing the common areas was supported by other language in the lease, thereby applying the rule of interpretation that lease language should be construed in the context of the entire lease. Other lease language stated that CAM “shall specifically exclude all costs associated with the leasing activity in the shopping center and all capital expenditures.” Therefore, the court concluded that all tenant-specific management activity, including problems with specific tenant spaces and capital expenditures for specific tenants, should not be included in CAM charges.

One of the most common rules of interpretation applied by courts is the principle that the words in a lease are to be given their plain and ordinary meaning. In Dinnerware Plus Holdings, Inc. v. Silverthorne Factory Stores, LLC, a 2004 decision by a state appellate court in Colorado, the court ruled that the lease language meant that the tenant was not obligated to pay any pass-through charges unless other tenants were obligated to do so. The court based this conclusion on the plain and ordinary meaning of the phrase “provided that all other tenants are similarly obligated” in the lease’s language regarding payment of pass-through charges.

CRITERIA 2 – EXTRINSIC EVIDENCE.

While the words of the lease are the most important criteria in determining the meaning of a lease, there are times that other evidence is considered. Other evidence considered in interpreting the meaning of a contract is referred to as “extrinsic evidence” or “parol evidence.” The consideration of such evidence will vary depending on the language of the lease, which may include provisions that state that the language is intended to constitute the intent of the parties and replace any prior statements, and specific state court rules regarding the consideration of such evidence. Some states, such as California, allow the consideration of extrinsic evidence to demonstrate that which would otherwise appear clear on its face is really ambiguous. Other states, such as New York, require that there be a determination first that the document is ambiguous on its face before the consideration of parol evidence is allowed. Regardless, it is almost a certainty that each side will bring up and seek to introduce to the court extrinsic evidence to support their interpretation of contract language.

Rarely is extrinsic evidence from tenant witnesses, actions or documents supporting tenant or extrinsic evidence from landlord witnesses, actions or documents supporting landlord highly persuasive. For example, in South Towne Centre, Inc. v. Burlington Coat Factory Warehouse of Dayton, Inc., a 1995 decision by an Ohio state appellate court, the court considered self-serving extrinsic evidence on whether the parties intended the expense of a new shopping center sign to be chargeable as a CAM cost. The court concluded that the extrinsic evidence – testimony by the landlord’s and tenant’s witnesses about what the parties intended – did not clarify the parties’ intentions, and therefore the extrinsic evidence did not resolve the issue. Ultimately, the court applied the rule of strict construction against the drafter based on the landlord’s failure to specifically include the signage expense in the lease’s list of chargeable CAM costs.

The extrinsic evidence that is most often persuasive is evidence created by one side and used against the other side. Such evidence can be in the form of documents, testimony or actions. An example of such evidence is course of dealing evidence. For example, in Johanneson‘s, Inc. v. Kraus-Anderson, Inc., a 1999 decision by a state appellate court in Minnesota, the court in disallowing a 5% management fee relied on the fact that from 1986 through 1995 the landlord had charged the tenant only for its share of actual maintenance expenditures plus the salary and benefits of the shopping center’s manager. Later, starting in 1996 the landlord began charging 5% of the tenant’s gross revenues as a fee for the landlord’s related management company to manage and maintain the common areas. The court seemed persuaded by the prior dealings between the parties that the additional 5% management fee was impermissible and not intended to be a chargeable CAM expense.

CRITERIA 3 – EVIDENCE OF BREACH.

If the tenant has developed a persuasive argument as to the meaning of the lease based on the lease language and rules of interpretation, there still remains a critical step in the process of advancing a strong claim. The tenant must have factual evidence that the landlord has breached the lease provision. In other words, assuming the tenant has shown that the lease means “x,” the tenant must show that the landlord failed to do “x” and did “y” instead.

There are circumstances where there is no dispute as to the facts once the meaning of the lease is established. The strongest tenant claim is one where the undisputed evidence shows there was a breach. However, there are many circumstances where complete evidence is not available to tenant. In some cases, the reason is that landlord has not provided it and in others, it is that center owner and operator never collected the evidence and it will be difficult to reconstruct the relevant evidence.

When information is available but not provided, it is almost always the case it can be obtained through discovery, if a lawsuit is filed. In such circumstances a tenant can consider how likely the evidence will support the claim in making an evaluation and recognize that a shopping center owner would likely provide the evidence if it supported the shopping center owner’s position.

When relevant information was not collected and it is difficult to reconstruct the relevant evidence, tenant may still be able to make a persuasive claim. First, courts apply common sense in evaluating evidence whether or not the landlord has breached the lease. Evidence presented by the landlord of its alleged compliance with the CAM provision in Sheplers v. Kabuto was found to be unpersuasive by the court under a common sense review. The landlord’s property manager testified that 100% of the on-site management costs were related to CAM. The court found “it impossible to believe that 100% of the property manager and her assistant’s work is directly related to CAM” particularly in light of the property manager’s admission that she and her assistant spent time on tenant-specific matters including leasing activity. Second, courts recognize that the landlord often has exclusive control over information needed to establish a breach. The lease in Sheplers required the landlord to provide the tenant with reasonable detail and a breakdown regarding CAM expenses, so the court shifted the burden to the landlord to show that the challenged management costs were CAM-related. The court explained: “Giving the provision such an effect is sound policy because defendant has complete control over all the records related to CAM expenditures.”

The bottom line: In successful claim after successful claim, it is the lease language that is most important. While extrinsic evidence and factual support of breach are also important, the starting point is the language of the lease.