Charging Tenant for Management Fees Not Mentioned in Lease

Q: The triple-net lease I signed with a stand-alone tenant at my shopping center provides that the tenant will pay its pro rata share of management fees and maintenance for the common areas, and that it will be responsible for the maintenance tasks for its own area. I recently hired a property management company for the center and I'd like to use it to maintain the stand-alone tenant as well and charge the tenant for those services. Can I ask the tenant to pay for this?

A: No, most likely. Under a typical "triple-net" lease, the tenant pays all expenses, including property taxes and insurance, maintenance, and utilities for its space, leaving the owner with no expense associated with the property. Unilaterally deciding to charge the tenant for management services it has not agreed to would be a breach on your part. After all, the tenant might have wanted a triple-net lease in the first place so that it has more control over its operations, including the cost of maintenance.

A Washington shopping center owner learned the hard way that it didn't have the right to charge a tenant for services that hadn't been contemplated at the time the lease was signed. In that case, a bank tenant signed a triple-net lease for a standalone building in a shopping center. The tenant would be responsible for property management tasks and their cost for its leased space, but also pay a share of the common area maintenance expenses for the rest of the property.

Without consulting the tenant, the owner hired a property manager to manage the shopping center. In addition to maintaining the center’s common areas, the property manager performed administrative functions regarding the tenant’s lease, such as billing it for monthly rent, property taxes, and sewer charges.

After the tenant was billed for management services by the owner, it refused to pay the fee and asked a trial court to determine whether it owed the management fees under the terms of the lease. The owner sued the tenant, alleging that it breached the lease by failing to pay the management fee. The trial court ruled in favor of the tenant. The owner appealed.

A Washington appeals court upheld the decision of the trial court. It noted that the triple-net lease provides that the tenant must pay “all costs, charges, and expenses of every kind and nature incurred in connection with the Ground Leased Premises and Property.” The appeals court said that the lease doesn’t require the tenant to reimburse the owner for the management fee the owner “unilaterally incurred for its own benefit and convenience.” That was because many of the management company's duties—such as collecting rent, property taxes, and sewer charges from the tenant—relate to administration and enforcement of the lease provisions. But the lease requires the tenant to pay only those expenses incurred in connection with the leased property, not expenses incurred in connection with the lease. The management company's collection activities involved expenses in connection with the lease but not the leased property. Therefore, they are not within the scope of the lease, said the appeals court.

Additionally, other lease provisions showed that the tenant and owner contemplated that the tenant, and not the owner or its agents, would assume responsibility for many of the duties the management company undertook. Under the lease, the tenant is contractually obligated to act as the “manager” of the leased property; interpreting the lease as requiring it to pay a property management company to duplicate its own management responsibilities would be inconsistent with the other lease provisions, said the appeals court [Viking Bank v. Firgrove Commons 3, LLC, September 2014].