CAM Charges and Operating Expense Disputes in Commercial Leases

How operating expense pass-throughs work

In a triple-net or modified gross lease the tenant pays, on top of base rent, its pro rata share of the landlord's costs of operating the building or center: taxes, insurance, maintenance and repair of common areas, utilities for shared spaces, security, landscaping, management fees and administrative charges. In a base-year lease the tenant pays only its share of the amount by which those costs exceed the costs in a stated base year. The landlord estimates the charges, bills them monthly, and after year end sends a reconciliation showing actual costs, the tenant's share, and a balance due or a credit.

The reconciliation is where disputes start. The tenant sees a large true-up, asks for the backup, and finds costs it believes do not belong, a share computed on the wrong denominator, or a cap that was ignored. The landlord sees a tenant that signed a lease agreeing to pay these costs and is now refusing to honor it.

The Texas rule: it must be in the lease

Property Code § 93.012(a) provides that a landlord may not assess a charge, other than a charge for rent or for physical damage to the premises, unless the amount of the charge or the method by which it is to be computed is stated in the lease, in an exhibit or attachment that is part of the lease, or in an amendment to the lease. Section 93.012(b) preserves the landlord's right to charges or remedies allowed by statute or common law.

For operating expense disputes the statute does two things. It confirms that a category of cost not described in the lease cannot be added to the reconciliation, however reasonable it seems: a new administrative fee, a charge for a service the lease never mentioned, or a management fee where the lease lists only taxes, insurance and maintenance. And it means that the method of computation matters as much as the category: a lease that promises a share based on rentable area cannot be reconciled on a share based on occupied area without an amendment. The statute does not, however, convert every disagreement about a listed expense into a statutory violation. If the lease allows the cost and the parties dispute its amount or reasonableness, that is a contract question.

The clauses that decide most disputes

Definitions and exclusions

The lease's definition of operating expenses, and its list of exclusions, is the center of the fight. Negotiated leases exclude capital expenditures (or allow them only amortized over useful life, or only when they reduce other costs or are required by new laws), leasing commissions and tenant improvement costs for other tenants, costs reimbursed by insurance or by another tenant, the landlord's debt service and ground rent, costs of correcting construction defects, the landlord's general corporate overhead, and fines or penalties caused by the landlord's late payment. Unnegotiated form leases often exclude little. Whether a roof replacement, a parking lot resurfacing or a new HVAC chiller is a repair (passed through) or a capital improvement (excluded or amortized) is the single most litigated question.

Pro rata share

The tenant's percentage is the premises' area divided by a denominator. If the denominator is the building's total rentable area, vacancy does not increase the tenant's share. If it is the leased or occupied area, the remaining tenants absorb the cost of vacant space. The lease fixes which, and reconciliations are often wrong on this point.

Gross-up

In a base-year lease, variable costs in the base year are grossed up to the level they would have reached at a stated occupancy (often 95 percent), so that a base year with high vacancy does not produce an artificially low base and a large pass-through later. A lease that provides for gross-up in the base year but not in later years, or the reverse, produces predictable disputes.

Caps

Caps limit annual increases in controllable expenses, often with taxes, insurance and utilities excluded as uncontrollable. A cumulative cap lets unused increase carry forward; a non-cumulative cap resets each year. A compounding cap grows on the prior year's cap rather than on actual costs. The wording decides which, and the arithmetic difference over a ten-year term is large.

Management and administrative fees

Leases commonly allow a management fee of a percentage of gross receipts or of operating expenses, sometimes with an added administrative fee. Disputes arise when both are charged on top of each other, when the percentage is applied to a base that includes taxes and insurance the lease excludes, or when the fee is charged to an affiliate above market.

Audit rights and deadlines

Most leases give the tenant a limited right to inspect the landlord's books: within a window after the reconciliation (often 60 to 180 days), on written notice, at the landlord's office, by the tenant or an accountant who is not paid on a contingency basis, with the results kept confidential. Many provide that if the audit shows an overcharge above a threshold, often 3 to 5 percent, the landlord pays the audit cost. Many also provide that a reconciliation not disputed in writing within the window becomes final and binding.

Those contest deadlines are the landlord's strongest defense and the tenant's most common mistake. A tenant that pays the true-up and raises questions a year later may find the lease treats the statement as accepted. Whether a short contractual deadline can cut off a claim entirely is a separate question, because Civil Practice and Remedies Code § 16.070 voids a contractual limitations period shorter than two years, and Texas courts distinguish between a deadline to object that is a condition of the right and a bar on filing suit. A tenant should not rely on that distinction; a written objection inside the lease window preserves everything. The underlying claim for breach of a written lease carries a four-year period under § 16.004.

Estoppel certificates are the other trap. A tenant that signs a certificate for the landlord's lender or buyer stating that no defaults exist and that all charges are current may be barred from later disputing reconciliations covered by the certificate.

Example

Suppose a Dallas law firm leases 20,000 square feet in a 200,000 square foot office building under a base-year lease with a 5 percent non-cumulative cap on controllable expenses and a 95 percent gross-up. The year-three reconciliation shows a true-up of $86,000. The firm's accountant reviews the backup inside the 120-day audit window and finds three issues: a $1.1 million chiller replacement expensed in one year rather than amortized as the lease requires, a management fee computed on gross receipts including the tenants' own expense reimbursements, and a share calculated on 180,000 square feet of leased area rather than the 200,000 rentable the lease specifies. The firm sends a written objection within the window. The landlord concedes the denominator, disputes the chiller as a repair and defends the fee base. Because the firm objected on time, the dispute is a straightforward contract case on two items; had it paid and waited a year, the landlord would also argue that the lease made the statement binding.

Remedies

A tenant that proves an overcharge recovers the excess as damages or a credit against future rent, with interest and, where the lease or Chapter 38 of the Civil Practice and Remedies Code allows, attorney's fees. Some leases also shift audit costs. A landlord that proves an underpayment recovers the shortfall, late charges and fees under the lease, and an unpaid reconciliation balance is usually a monetary default that opens the landlord's default remedies. A tenant should pay the undisputed portion while the dispute runs; withholding the whole true-up risks a default, as explained in commercial lease disputes in Texas. The fee rules for contract cases are covered in recovering attorney's fees in a Texas contract case.

Evidence

• The lease, every amendment and any estoppel certificate the tenant signed.
• Each year's estimate letter, reconciliation and the general ledger detail behind it.
• Invoices for the disputed items, especially anything capital in nature.
• The rent roll and building measurement supporting the denominator.
• The tenant's written objections and audit requests, with proof of delivery dates.

When to involve a litigator

Inside the audit window, not after it. A letter that invokes the audit right and objects to specific items in the lease's own terms preserves the claim and often produces a corrected statement without a lawsuit. Tina Wysk represents landlords and tenants in operating expense and lease accounting disputes in Dallas-area courts through the firm's real estate litigation practice.