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Lease Accounting 101: Tenants Suing Landlords For Fraud And Maintenance Expenses

Kelly McLain leased space in a small, strip mall for her A+ Teaching Supplies store in Valencia, California.  Her landlord, Octagon Plaza, LLC represented the space she would lease was approximately 2,624 square feet, and that her store was 23% of the entire mall, so she also had to pay 23% of the common area maintenance charges based on 11,835 square feet in the mall.  Her rent was $1.45 per square foot, making her base rent (before CAM charges) $3,804.

No, the next question is not going to be:  if one train left the station at 3:12 p.m. traveling west at 54 miles an hour and another train left the station at 3:36 p.m. on the opposite side of town travelling east at 36 miles an hour, then when will they meet?

The question here is whether a tenant can sue her landlord for fraud and to what extent can she obtain an accounting of the CAM charges?

The lease allowed her to verify the square footage of the store, and when she sought to do so, her landlord became offended that she would question the integrity of the representation, so she accepted the measurement as is. 

Unfortunately, the space was smaller and the shopping center was bigger.  Kelly obtained a copy of Octagon's application for earthquake insurance, which listed the overall size of the mall at 12,800 square feet and her space slightly smaller at 2,438.  At that size, she would have been responsible for only 19% of the CAM charges and her base rent would have been lower at $3535 per month.

The trial court ruled based on those facts that she wasn't able to establish fraud, but the court of appeal reversed, noting that over the term of her lease, the difference amount to $90,000 in rent, despite the slight monthly differences.

The appellate court also ruled that Kelly's lease provision entitling her to inspect and verify the basis for the CAM charges allowed her to do just that, and required Octagon to open its records to her.  When you read the opinion, you'll discover the relationship between the tenant and landlord was much more acrimonious than I've described here, so you'll probably guess that Kelly wanted to do more than verify the CAM charges, she wanted to be able to disallow those she thought were unnecessary.  The court granted her access to the records, but stopped short of giving her a vote based on the language in the lease. 

By the way, the Octagon Mall is presently listed for sale at $6,800,000, with its square footage listed at 11,835, with seven tenants.  No word whether A+ Teaching Supplies is still there.

Printer friendly page Permalink Email to a friend Posted by J. Craig Williams on Saturday, February 02, 2008 at 12:34 Comments Closed (0) |
 
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