Charging management fees or administration fees to tenants under a net or carefree lease 

publication 

November 2012

Real Estate Bulletin

In most commercial leases the gross rent payable by a tenant to a landlord has a number of components including the basic rent, a share of realty taxes and a share of operating costs (sometimes called common area maintenance (or CAM) costs).

The Ontario case of C.C. Tatham & Associates Ltd. v 2057870 Ontario Inc. is another reminder that for an item to be payable by a tenant it must be specifically listed in the lease and that the usual general words describing the nature of the lease as being a net or carefree lease may not be enough to allow the landlord pass through the costs to the Tenant.

facts

C.C. Tatham & Associates Ltd. (the "Tenant") was the tenant of 205787 Ontario Inc. (the "Landlord") of a second floor in a commercial building in Collingwood, Ontario. It was a 10 year lease that commenced in 2006. In 2009 the Tenant brought an application to the court disputing various items. Included in the application was a request that the court declare that no administration fees, mark-up or management fees can be charged as additional rent to the Tenant under the terms of the lease.

The lease provided that the Tenant would be charged its share of the total of all reasonable and proper expenses, costs, fees, rentals, disbursements and outlays of every kind pertaining to the property and building of which the premises formed a part, computed in accordance with generally accepted accounting principles and incurred in the complete maintenance, repair and operation of the property.

The lease also contained a provision that expressed that it was the intention of the parties that the lease be a completely carefree lease, that the base rent would be net to the Landlord and that the Tenant would pay as additional rent its share of all charges, impositions and expenses relating to the subject property.

However, in the list of all of the charges and expenses that could be passed through to the Tenant there was no specific inclusion of any management fees or admistrative charges.

the decision

The Landlord claimed management fees on the basis of a wide variety of property management services that were described in the materials before the court. These included activities generally undertaken by a landlord or a manager on its behalf, such as arranging property insurance, negotiating and entering into service and maintenance contracts (such as snow removal, waste, HVAC), attending to building security, retaining consultants in matters such as realty tax and buying equipment, supplies and materials necessary to the building.

The Tenant argued that such management fees were not payable under the terms of the lease.

The court agreed with the Tenant. Various case law was considered and the court held that there was no specific provision for management or administration fees and that such a provision is required for a landlord to claim such fess. Simply agreeing that the lease was a completely carefree net lease does not infer an agreement to include management or administration fees.

The court pointed out that it followed other cases in the past where, among other things, courts have held that charges for the performance of landlord's duties (such as management items) cannot be passed on simply because the lease is described as "absolutely net", "net net" or "net" or any other words of similar implication.

conclusion

Most sophisticated commercial net leases contain a specific obligation that the tenant pay its share of the third party management fees or an equivalent fee (often 15% of operating costs or a percentage (such as 3% or 4%) of the gross income for the building). The Tatham & Associates case is a reminder to landlords to ensure that their lease forms specifically provide for this charge (and any other charges intended to be passed on) and a suggestion that tenants may want to review their leases against the landlord's annual statements to ensure that costs being charged are specifically mentioned in the lease.

by William (Bill) Rowlands

cautionary note

The foregoing provides only an overview and does not constitute legal advice. Readers are cautioned against making any decisions based on this material alone. Rather, specific legal advice should be obtained.

© McMillan LLP 2012