5 Key Commercial Lease Terms: #3 What is CAM?

 The 5 Key Commercial Lease Terms for Restaurants:

Get “On the Same Page” As Your Landlord, Figuratively and Literally 

What is CAM?

Finding and leasing commercial space has a different set of rules than for residential rental properties.  One golden rule, however, remains true in both cases: thou know and understand the key lease terms and ensure the lease agreement is specific and clear.  In this series, we will analyze the key terms of a commercial lease relationship.  This is the fourth part of a six-part series, examining the key terms in your commercial lease agreement.  Today, we’ll discuss the Common Access Maintenance or CAM.

What is CAM?

Common Access Maintenance, CAM, is a fee for the common, shared areas of a commercial space, such as hallways, public bathrooms, parking, courtyards, roofs, walkways, and so forth.  CAM is calculated one of two ways: (1) a flat, fixed amount or (2) a variable amount, depending on a number of factors.  CAM fees may be paid on a regular basis, such as monthly, quarterly, or annually, or they may be charged periodically when major repairs to the building or entire business/industrial park become necessary.

Danger, Will Robinson!

Most definitions of CAM are vague and over-simplified, giving the landlord flexibility to pass along fees that the tenant may not anticipate.  And, like most things, the parties often overlook this provision of commercial leases until a large CAM fee is forwarded to the tenants.  Moreover, in the case of variable CAM fees, the rates can escalate more quickly than monthly rental rates because of its flexible nature.  Thus, a lease’s attractive price per square foot may be deceptive when the CAM fees later escalate.

Accordingly, it is crucial for a tenant to reach an understanding with the landlord on the meaning of CAM in their particular lease agreement and to clearly record that understanding in the lease agreement, including how often the fees are to be paid and how much they can be increased each year.  Furthermore, I recommend that lease agreements provide for a cap of CAM fees each year to preclude a landlord, eager to make overdue repairs or long-desired renovations, from taking advantage of an unsuspecting tenant.

After the rent payment, CAM is probably the most important consideration in a lease agreement.  Please be sure to use caution and diligence in negotiating this lease term and carefully and accurately record it in the lease agreement.  If you don’t feel comfortable doing so or if you fear being overmatched by your would-be landlord, then I recommend seeking the aid of attorney.

Next up, we discuss insurance coverage.

Cheers!

 

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5 Key Commercial Lease Terms: #2 Know Your Square Footage

 The 5 Key Commercial Lease Terms for Restaurants:

Get “On the Same Page” As Your Landlord, Figuratively and Literally

Rentable Square Feet v. Useable Square Feet

Finding and leasing commercial space has a different set of rules than for residential rental properties.  One golden rule, however, remains true in both cases: thou know and understand the key lease terms and ensure the lease agreement is specific and clear.  In this series, we will analyze the key terms of a commercial lease relationship.  This is the third part of a six-part series, examining five key terms in your commercial lease agreement.  Today, we’ll discuss the nuances of Rentable Square Footage and Useable Square Footage and importance in understanding the two.

You should understand, and your lease agreement should make clear, the premises Rentable Square Feet vis-à-vis the Usable Square Feet.  Usable Square Feet, as the name suggests, is the square feet of the premises that you are actually occupying, such as the dining room, kitchen, storage space, and office space.  Rentable Square Feet consists of your Usable Square Feet plus some amount of shared space, such as hallways, bathrooms, and so forth.  While you only occupy the Usable Square Feet, your rent payment will be based on Rentable Square Feet.  Accordingly, when shopping for commercial space and reviewing proposed rental rates, keep in mind that the square feet that you occupy will only be a portion of the square feet for which the rent payment is calculated.

In order to promote their properties at a seemingly competitive price per square foot, it is not uncommon for commercial realtors to advertise the price per square foot, based on the Rentable Square Footage.  Be savvy to this trick.  Before going to see the property, inquire as the Usable Square Footage vis-à-vis the advertised price.  Likewise, when viewing a property, be mindful that you’ll be paying for space for which you do not enjoy exclusive control.  Inquire into this additional square footage that will be included in your lease agreement and rent obligation.

Next up, we discuss the Common Area Maintenance fees.

Cheers!

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5 Key Commercial Lease Terms: #1 Know Your Rent Payment

The 5 Key Commercial Lease Terms for Restaurants:

Get “On the Same Page” As Your Landlord, Figuratively and Literally

Know Your Rent Payment

Finding and leasing commercial space has a different set of rules than for residential rental properties.  One golden rule, however, remains true in both cases: thou know and understand the key lease terms and ensure the lease agreement is specific and clear.  In this series, we will analyze the key terms of a commercial lease relationship.  This is the second part of a six-part series, examining five key terms in your commercial lease agreement.  Today, we’ll discuss the nuances of rent payments.

There are various ways of calculating a commercial rent payment, ranging from beneficial to the tenant to detrimental to the tenant.  Leases can have flat rent payments, rent payments that are variable, i.e. based on the restaurants sales, or a combination thereof.  An important issue with rent payments is whether it includes other fees, like maintenance, taxes, and insurance.  Here are descriptions for some common rent payment paradigms:

  • A Fully Serviced Lease – a lease with a monthly rent payment that includes the cost of certain services, such as janitorial services, utilities, water and sewer charges, property taxes, and so forth.
  • A Double Net Lease – a lease that requires the tenant to pay for all or part of taxes and insurance, in addition to the rent payment.
  • A Triple New Lease – a lease where the tenant pays all or part of the taxes, insurance, and maintenance associated with use of the property.  In this case, a tenant typically does not pay additional Common Access Maintenance fees, though the tenant, in essence, is paying for it in his or her lease agreement.
  • A Gross Lease – if you could get it, this lease is more akin to a residential lease agreement, where the landlord pays the usual costs of maintaining the premises, including not only maintenance and taxes but, perhaps, also utilities and insurance.

In my experience, landlords seek to pass on common maintenance costs, insurance, and taxes either has part of the monthly rent payment or as stipulated Common Area Maintenance fees (see series part #4).  Whether these costs are included in the rent or Common Area Maintenance fees, a wise tenant will ensure that the premises are not in need or on the verge of significant repairs or improvements and, as a safety, will ensure the lease agreement has a cap on the fees.

Next up, we discuss the difference between rentable square feet and usable square feet and its importance.

Cheers!

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5 Key Commercial Lease Terms: Introduction & The Importance of a Mutual Understanding

The 5 Key Commercial Lease Terms for Restaurants:

Get “On the Same Page” As Your Landlord, Figuratively and Literally

Introduction & The Importance of a Mutual Understanding, Clearly Recorded in the Lease Agreement

Finding and leasing commercial space has a different set of rules than finding and leasing residential rental properties.  One golden rule, however, remains true in both cases: thou shall ensure the lease agreement is specific, clear, and representative of thou’s understanding of key terms and issues.  In this six-part series, we will analyze the key terms of a commercial lease relationship, the importance that the parties reach a mutual understanding of the meaning of those terms, and that such understanding is clearly written in the lease agreement.

Here’s an example of where things go wrong.

Imagine if a commercial landlord leases a property for the exclusive use of “a coffee shop.”  Suppose months into the lease agreement, the tenants desire to enhance their value to their customers by featuring alcoholic liqueur in some of their specialty, artisan coffee drinks and proceed to obtain the necessary licensing.  The lease is silent on the sale of alcohol.  After learning of the tenants’ intent to obtain a license to sell liqueur, the landlord approaches the tenants and informs them that the sale of alcohol is a “change of use” under the lease agreement, which only permits the use of premises for “a coffee shop.”  The landlord defiantly declares that a coffee shop selling liqueur constitutes “a bar,” and he doesn’t want a bar in his premises.  He promises to evict the tenants for violating the lease agreement if they sell their artisan coffee drinks with liqueur.

Believe it or not, I’m currently representing a client in a similar fact pattern.

Who’s right?  Well, it depends on a few factors, which are beyond the scope of this article.  One thing’s for sure – the tenants, in this example, would either have to preclude from selling liqueur or face a possible eviction.  And, if they continued with the sale of alcohol and were ultimately evicted, then the tenant would likely sue for wrongful eviction, and the definition of “a coffee shop” would be resolved by a judge.

As you can see, a misunderstanding of an important lease term, coupled with a vague, nonspecific recording of that term in the lease agreement, can lead to various problems.  A tenant could be force to unexpectedly pay thousands of dollars for repairs or renovations for common area maintenance fees.  Or, a tenant may see her rent payment unexpectedly increase as her restaurant’s sales in increase.  Or, a tenant may be forced to purchase expensive insurance coverage, for which she did not anticipate, significantly increasing her overhead.  Or, worse yet, the landlord, as in the above example, may seek to evict the tenant, because the tenant is using the premises for something different than what the landlord and the lease agreement, in his opinion, permits.

In these situations, the landlord typically has all the leverage against the tenant, forcing the tenant to debate between breaking the lease (and accepting the penalties therewith) or accepting the common area maintenance fees, the landlord’s opinion on the permitted use, or whatever the case may be.

Remember, the specific language of the written lease agreement will, itself, determine the outcome of any legal dispute between the parties, regardless of any verbal statements or assurances made at the time of negotiation or signing of the contract.  If one party were to sue the other, a judge would focus on the language of the lease agreement.  The judge may accept witness testimony of any verbal discussions between the parties on the disputed term, but, inevitably, the parties will each submit testimony that supports its own position, precluding the judge from believing one party over the other – the proverbial “he said/ she said” scenario.  And, disputes over lease terms often arise in unforeseen matters, such as the definition of “a coffee shop.”

In the above example, wouldn’t it have been nice if, instead of identifying the use as “a coffee shop,” the lease said “for a restaurant?”  I think anyone would agree that restaurants sell beer, wine, and alcohol and do not constitute a bar.  Likewise, if the lease only spoke to “a coffee shop,” wouldn’t it have been nice if the lease spoke to the sale of alcohol?

If you can see the mess that vague terminology can cause for tangential issues like a coffee shop selling specialty, liqueur coffee drinks, imagine the anxiety, stress, grief, and, let’s face it, attorneys fees that can flow from poor drafting of key terms of a contract, such as monthly rent payments, common access maintenance, square footage, required insurance coverage, and other considerations – all of which we’ll take in turn over the next five articles of this six-part series.

Stay tuned.

And, if you are an existing or start-up restaurateur or other culinary entrepreneur, I would love to be a part of your team and handle your legal affairs, so you can do what you do best: drive culture across America.  Visit my website or contact me via email.

 

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5 Key Commercial Lease Terms for Restaurants: Get “On the Same Page” As Your Landlord, Figuratively and Literally

On Nov 21, I will begin a series, entitled “5 Key Commericial Lease Terms for Restaurants.”

It is the language on the piece of paper that matters, not the words that are spoken between us and the landlord.  Thus, it is imperative to ensure our understanding of the terms and conditions of a lease are accurately captured.  Likewise, it is imperative that we know what to look for in a lease agreement, and what the key terms means.

Starting Nov 21, we explore these items.

Cheers!

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