Most retail tenants desire to locate their respective businesses amongst other retail businesses in malls, retail shopping centers or other mixed-use centers. Therefore, when negotiating retail leases, some of the most heavily discussed provisions involve the tenant’s share of Common Area Maintenance (“CAM”) expenses. CAM expenses essentially determine how much money a tenant will contribute to the upkeep and maintenance of the surrounding shopping center owned by the landlord.
When negotiating CAM expenses, a landlord and tenant will need to agree upon which portions of the shopping center will be considered “common area” for CAM expense purposes. The landlord will oftentimes want maximum flexibility regarding what is considered common area; whereas the tenant may want to restrict the common areas to certain portions of the shopping center or only to those areas which are already developed for shopping center uses.
One of the most heavily negotiated aspect of retail leases involves determining what costs will be included or excluded from CAM expenses. Landlords want as many maintenance, replacement, management and construction costs for the shopping center included in their tenants’ CAM expenses. Tenants, on the other hand, will often push back on certain CAM expenses such as new construction in the shopping center, capital expenditures, property management fees, shopping center employees’ salaries, brokers’ commissions and leasing fees, and utility impact fees (among many more). Similarly, oftentimes the tenant will suggest a maximum cap on CAM expenses paid in any given year, or limit the annual increase permitted for a tenant’s share of CAM expenses (i.e., tenant’s payment of CAM expenses will not increase more than 5 percent from the previous lease year).
How to calculate the tenant’s proportionate share of CAM expenses can also be heavily negotiated. Typically, shopping center leases will provide that the tenant’s share of CAM expenses will be the ratio of the floor area square footage of the tenant’s premises to the total floor area square footage of other buildings in the shopping center. However, this ratio is not as clear cut as it may seem. Tenants may want the denominator of that ratio to include only currently leased buildings or only existing building areas shown on a pre-approved site plan so as to avoid paying CAM expenses for unbuilt premises. On the other hand, landlords want to ensure their CAM costs are allocated as advantageously as possible to maximize coverage of their CAM expenses.
The examples above demonstrate just a few of the oft-debated CAM topics in retail leases. While many provisions in commercial leases deal with the “what if” or the worst-case scenario, CAM provisions affect the day to day bottom line of both tenants and landlords, and it is important for both parties to review CAM provisions closely with the aim of reaching mutually beneficial and agreeable terms.