Lease Audit Information

TOPIC OF THE WEEK:

Sheplers, Inc. vs. Kabuto International Corporation (63 F. Supp. 2d 1306, 1313-14 (D. Kan. 1999)):

On August 6, 1999 a case was decided by the US District Court of Kansas between a landlord (Kabuto) and tenant (Sheplers) over common area maintenance charges. The tenant brought the action against the landlord for declaratory judgment and an accounting under the lease between the parties. The parties' dispute concerned whether certain costs were properly chargeable to tenant as common area maintenance charges under the lease.

The lease contained very standard language regarding the common areas and what the common area expenses could include. The judge's rulings on several pertinent issues (some of which we have discussed) were as follows:

Burden of Proof/Expense Substantiation

Landlord has control of the records relating to CAM expenditures. Therefore, Landlord has the burden of proof. It is not the responsibility of the tenant to prove why an expense is not allowable in CAM - it is the responsibility of the Landlord to prove why an expense is allowed in CAM.
If Landlord cannot substantiate an expense, it is not allowable in CAM.

Off-Site Management Fee/On-Site Management Expenses

Only management costs related specifically to the common areas are includable. If Landlord can provide reasonable, credible detail establishing that part of the off-site management fee or on-site management expenses are directly related to CAM, that portion of the expenses is includable. However, based on the evidence provided by the Landlord (the contract between Landlord and managing agent), the court concluded that none of the off-site management fees were directly related to CAM.
Also, because Landlord could provide no credible evidence regarding the on-site expenses and the testimony of the property manager lacked credibility, the on-site expenses were excluded from CAM.
Tenant may reasonably require that the percentage of time spent by the property manager or other employee be evidenced by records of daily time and the allocation of that time to various activities.

Administrative Expenses

Since the lease provided for operating and managing the common areas and did not provide for an "administrative fee", the judge ruled that administrative expenses that were directly related to CAM could be included. However, since the landlord provided no credible evidence to support the inclusion of these expenses, the administrative expenses were excluded.

For a full transcript of the case, please e-mail your address and we will mail it to you!

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