Get Option to Pass Through Costs Required by Center's Governing Document

If your center has a governing document, you may incur additional costs to comply with it. For example, an operating and easement agreement (OEA) may require you to maintain the interior access roads through your center or detention ponds. Or a declaration of covenants, conditions, and restrictions (CC&R) may require you to perform future maintenance or development work at the center. Since these costs can be quite high, you'll want to pass them through to your tenants.

But if your leases are like many we've seen, they may have a big loophole that could leave you responsible for these costs. The loophole: The leases don't address whether you can pass through these costs to your tenants. Even if you decide to pass them through anyway, the tenant may refuse to pay them. Then you could be stuck with the costs.

Add Pass-Through Option to Leases

To plug this loophole, say in all of your leases that you've got the option to pass through to the tenant as a CAM cost any cost that your center's governing document requires you to pay that relates to the center, says Denver attorney Bonnie Larson-de Paz. Identify the governing document in effect. Then, don't list each cost individually—since you run the risk of unintentionally leaving some costs out, she explains. Just say in general terms that all costs from the governing document can be passed through to the tenant, she advises.

Here's language you can add to your leases to plug this loophole:

Model Lease Language

Landlord, at its option, may include the costs and expenses under the [insert name of governing document, e.g., Reciprocal Easement Agreement] for the Center or any part thereof in the charges to be paid by Tenant for the Common Areas under Clause [insert # of CAM clause].

Practical Pointer: If your lease says that only the CAM costs specified in the lease may be passed through to the tenant, make sure you compare these CAM costs against those in your governing document and make any necessary adjustments to the lease, says Larson-de Paz. Otherwise, you may miss out on costs that the tenant should pay, she warns.

Insider Source

Bonnie Larson-de Paz, Esq.: Isaacson, Rosenbaum, PC, 633 17th St., Ste. 2200, Denver, CO 80202; (303) 292-5656; blarson@ir-law.com.