Don't Agree to Keep CAM/Operating Expense Costs “Competitively” Priced

Tenants that must pay common area maintenance (CAM) or operating costs typically want assurances that landlords will keep those expenses reasonable and in line with the average costs that owners of other shopping centers or office buildings in the area pay. And if the tenant has bargaining clout, you’ll have to give in to their demands. The typical result is a commitment by the landlord to hire contractors and service vendors that are “competitively” priced. But while the word “competitively” might sound harmless enough, attorneys warn that using it in this context could inadvertently expose you to liability and even claims for operating expense rebates.

Failing to Get Multiple Bids Could Be Lease Violation

The agreement to hire contractors and buy servicing items that are “competitively” priced implies that you’ll hold some kind of price competition when procuring the services and goods included in your operating expense calculation, cautions a New York City leasing attorney. For example, you may require contractors to submit competitive bids when deciding which one to hire to mow the grass and maintain the landscaping around your building. Doing this for each contract you need to maintain and operate your property may be totally unrealistic, especially when the savings you realize on contract rates are offset by the added time, costs, and administrative burdens that staging a bidding process forces you to incur. In addition, having to base important contracting and purchasing decisions purely on who offers the lowest prices isn’t the way most landlords want to run their building or shopping center.

But while this may not have been what you had in mind, tenants may argue that this was their expectation when you agreed to keep your operating costs “competitively” priced. As a result, they may demand to audit your CAM and operating expense books and accuse you of breaching a material lease provision. And even if their claims are invalid, the disputes and hassles they provoke may prove to be a millstone around your neck.  

Solution: Agree to Keep Costs “Comparable” Rather than “Competitive”

You can avoid this problem by avoiding the word “competitive.” You should also resist tenant demands to keep CAM costs or operating expenses “reasonably” priced because the word is so vague and open-ended. Instead, agree to keep the services and goods that constitute your CAM costs/operating expenses “comparable” to those incurred by similar buildings or shopping centers in your area. “Comparable,” according to The Merriam-Webster Dictionary, means “capable of or suitable for comparison,” a definition that’s much more likely to be in line with how landlords regard and want to describe their obligations with regard to operating expense prices.

Model Lease Language

The costs of the items and services listed in Section [insert # of lease provision where CAM costs or operating expenses are listed] herein shall be comparable to the costs incurred by other landlords of similar [office buildings/shopping centers/other property type] in [insert region, e.g., New York metropolitan area] for similar items and services.