Real estate is one of the best investments you can make in California, but there are still costs involved. If you lease out spaces in a commercial property to multiple lessees, for example, you need to ensure that the entire space is kept in good condition. That costs money, and someone has to pay for it.
Many California commercial property owners handle this through Common Area Maintenance charges, or CAM charges. The amount spent on common area maintenance over the course of the year is divided among the lessees and charged in addition to the standard lease fee.
When this system works, it works very well. However, when a lot of maintenance is necessary, or when a lessee fails to budget for a year-end CAM reconciliation statement, things can get messy. In fact, CAM charge disputes are among the most common and most stressful sources of commercial landlord-tenant litigation in California.
At Peterson Law, LLP, we have years of experience helping commercial property owners in San Diego and around California handle CAM charge disputes, both before and after they escalate to litigation. Here’s what you need to know about CAM commercial lease disputes, why they happen, and when to get help.
What Are CAM Charges? Why Do They Matter?
Most commercial leases require the lessee to maintain the space that they are actually renting. For example, a business renting out a single storefront of a strip mall is typically responsible for cleaning and maintaining the interior of that space.
But what if there’s a sidewalk or parking lot shared by multiple storefronts? What about the building’s plumbing and HVAC systems? What about interior hallways and lobbies? Those are referred to as common areas, and common area maintenance in a commercial lease are handled in one of two ways.
- Gross Lease: Under a gross lease, the lessee is charged a single flat rent rate. Any maintenance is paid for by the property owner out of pocket.
- Modified Gross or Triple Net (NNN) Lease: Under a triple net lease (or a modified gross lease), the lessee pays a lower rent rate, but agrees to pay pro-rated CAM charges on top of the rent. The percentage of the total CAM charges to be paid by a given lessee should be set out in the contract.
Gross leases avoid the risk of CAM disputes entirely. However, they’re less popular among property owners because investment earnings are less consistent. For example, if a property needs a whole new HVAC system installed, the owner has to pay for it, cutting into their potential investment income. Meanwhile, under NNN and modified gross leases, the lessees take on that expense, making investment earnings more stable.
If all parties are on the same page, the CAM charges shouldn’t come as a surprise. However, CAM provisions can differ substantially from contract to contract. If a given contract is ambiguous, it can quickly lead to triple net lease disputes in California.
The Four Types of CAM Disputes We See Most Often
At Peterson Law, we see CAM cases frequently, both in San Diego and around the state. Across our cases, these are the four most common causes of CAM charge disputes:
1. Calculation Method Disputes
In many situations, the lessee was aware they had to pay CAM charges under the lease. However, they disagree with how their share of the total costs was calculated.
For example, pro-rata shares are often disputed. How is the tenant's proportionate share calculated? There may be a substantial difference depending on whether the pro-rata calculation was done using the gross leasable area, the occupied area, or the total building area. If the specific method was not outlined in the original contract, this can quickly escalate to litigation.
Similarly, some leases include provisions that exclude certain tenants from paying CAM costs. If there are anchor tenant carve-outs, for example, this may shift some costs onto other tenants. Similarly, if vacant space exclusions are not properly accounted for, lessees may face higher CAM costs, leading to disputes.
Gross-Up Provisions
Many leases are written under the assumption that a building will be at full occupancy, and CAM pro-rata shares are often based on that assumption. For example, if a building includes five equally sized spaces, each tenant’s contract might state that they are responsible for 20% of the total CAM costs.
But what happens if the building is at 60% occupancy? The cost of operating the building may have dropped to 60% of the normal amount, but the tenants would only be paying 60% of this reduced cost: 60% of 60%. The remaining 40% of the reduced costs would have to come out of the landlord’s pocket.
To prevent these situations, the lease may include a “gross-up” provision, which allows the landlord to use the estimated costs of a fully occupied building as the basis for CAM charges. However, tenants may dispute how this amount was calculated, leading to commercial tenant CAM overpayment litigation.
2. Impermissible Expense Inclusions
Most leases include terms that dictate what kinds of expenses can be billed to tenants under CAM provisions. Specifically, only items that are considered “maintenance” can be billed in most cases. Expensive and one-off maintenance items, such as roof replacements or HVAC upgrades, may fall into a gray area in some leases. Tenants can argue that these types of modifications are capital improvements, not maintenance, making them an impermissible expense.
Other impermissible expenses can include:
- Management fees: Percentage-based management fees may or may not be explicitly permitted under the lease.
- Expenses benefiting other properties: Tenants may argue that CAM charges were improperly allocated from other buildings in a portfolio.
- Landlord employee costs: If a property owner hires a maintenance team, the costs involved in compensating these workers may or may not be permissible CAM expenses.
- Legal fees: If the property owner is sued for something related to the property, those legal expenses are often grounds for CAM charge disputes in California.
3. CAM Cap Provisions
Many commercial tenants negotiate annual CAM increase caps to protect themselves from escalating operating costs. Depending on the contract, the cap might be set at 3-5%, or tied to the Consumer Price Index. In high-inflation years, this can pose a problem for landlords.
Disputes happen when tenants and landlords disagree on what expenses should be covered by this cap. Depending on the contract, “controllable” expenses may be capped, while “uncontrollable” expenses may be excluded.
Caps can also be cumulative or non-cumulative. If inflation is 8% one year, a non-cumulative cap would not let the landlord roll over the additional 3% of costs into the next year. A cumulative cap, however, would permit that rollover. If a lease doesn’t clarify if a cap is cumulative or non-cumulative, that’s a one-way ticket to a legal dispute.
4. Reconciliation Failures
Landlords are required to provide tenants with an annual reconciliation statement that explains what the CAM charges were for the year. During the lease year, tenants typically pay estimated CAM charges based on projected costs. At the end of the year, the landlord “reconciles” the estimate against the actual costs, and either provides commercial tenant CAM overpayment credits, or charges for extra costs.
If a reconciliation statement is late, inaccurate, incomplete, or otherwise doesn’t fulfill lease requirements, tenants may be able to dispute the entire CAM bill. In fact, some leases dictate that in the case of a late reconciliation statement, the landlord forfeits their right to collect any CAM shortfalls for the year.
When CAM Disputes Escalate to Litigation
The average CAM dispute can be resolved through negotiation out of court, especially if landlords choose to work with experienced commercial real estate attorneys.
However, in some cases, informal or alternative dispute resolution methods are not enough for the complexity of CAM disputes. In these cases, there are several litigation theories that tenants may pursue against landlords:
- Breach of contract (lease violation): The most common claim is breach of contract. A tenant who can show that a landlord included impermissible expenses in the CAM pool, miscalculated the tenant's proportionate share, failed to apply a negotiated cap, or failed to issue a required reconciliation statement has the foundation for a breach of the lease.
- Breach of the implied covenant of good faith and fair dealing: This is frequently pleaded alongside a breach of contract claim, particularly where tenants allege that the landlord's overcharges were not accidental but reflected a systematic practice of inflating the CAM pool. In short, the tenant argues that the landlord was not acting “in good faith” and was attempting to take advantage of them.
- Unjust enrichment/money had and received: These claims allow tenants to argue that the landlord received money to which it was not entitled and that equity requires its return, even apart from the specific contract language.
- Declaratory relief: Tenants also frequently seek declaratory relief to establish the proper calculation methodology going forward, particularly in ongoing lease relationships where the dispute over calculation method will recur each year.
Landlord Defenses and Counterclaims
As a landlord, you’re not without your defenses. One of the most important is waiver of audit rights. If the lease imposes a deadline for conducting a CAM audit and the tenant fails to act within that window, courts can find that the tenant waived the right to challenge the billing for that year. Landlords should document their compliance with reconciliation procedures carefully, because evidence of timely and proper notice can cut off a tenant's ability to look back beyond the audit deadline.
Landlords can also assert counterclaims. An audit that reveals overcharges sometimes also reveals underpayments for other years, and landlords can assert those claims affirmatively.
The statute of limitations for a written contract claim in California is four years under Code of Civil Procedure Section 337. For CAM disputes, the clock generally begins to run when the landlord issues the reconciliation statement or, if no statement is issued, when the expenses are charged. The discovery rule can extend the limitations period in cases where a tenant could not reasonably have known about the overcharge, which is one reason why audit rights have real practical value. It is important to check with an attorney to get an assessment on any statute of limitations period.
Lease Interpretation in CAM Disputes
Commercial leases frequently require mediation or arbitration before litigation. As a result, property owners facing a CAM dispute should always double-check the dispute resolution clause in the relevant lease before taking any formal action. California courts provide resources on alternative dispute resolution, and many CAM disputes are resolved through that process rather than through trial. That said, having experienced litigation counsel involved early, whether the dispute heads toward arbitration or court, is essential to protecting your position.
When courts do interpret disputed CAM provisions, they apply California's standard contract interpretation principles. Under Civil Code Section 1638, clear language governs. When language is ambiguous, courts look to the parties' intent under Civil Code Section 1639.
Finally, under Civil Code Section 1654, “In cases of uncertainty not removed by the preceding rules, the language of a contract should be interpreted most strongly against the party who caused the uncertainty to exist.” In the case of a landlord-drafted commercial lease, that’s almost always the landlord.
What California Commercial Property Owners Should Do Now
The best time to address CAM dispute exposure is before disagreements happen in the first place. If you’re a property owner who already has commercial tenants under NNN or modified gross lease, there are several steps you may want to consider:
- Review your leases before the next reconciliation cycle. CAM definitions, permissible expense categories, exclusions, gross-up provisions, cap structures, and audit right procedures should all be unambiguous. If your leases were drafted years ago and you have not recently reviewed the CAM provisions, that is worth doing with counsel before the next reconciliation statement goes out.
- Maintain meticulous records. Every expense included in your CAM pool should be documented with invoices, vendor contracts, allocation worksheets, and internal records that show how costs were assigned to the property and apportioned among tenants. Your records should match what the lease requires you to produce if a tenant exercises its audit right.
- Issue reconciliation statements on time and in the format your lease specifies. Late or incomplete reconciliation statements are one of the most common and most avoidable sources of CAM disputes. If your lease specifies a deadline and a required format, follow them exactly.
- Respond to audit requests in writing and within the timeframe your lease specifies. Failure to cooperate with a properly noticed audit creates litigation risk and can make it harder to defend against subsequent claims. Document every step of your response.
- Involve counsel before responding to a formal dispute letter or audit demand. The letter or demand that arrives after a tenant has engaged an attorney is a signal that informal resolution may not be possible. Having your own counsel involved early, before positions harden, gives you the best chance of resolving the dispute without litigation.
CAM Disputes Are a Landlord Problem Too
CAM problems aren’t just a tenant issue. Property owners like you face financial exposure and even potential liability for attorney fees in CAM cases if the ruling favors the tenant.
If you are a California commercial property owner facing a CAM dispute, responding to an audit demand, or concerned about your exposure under existing lease terms, Peterson Law is here to help. Our litigation team works with commercial landlords throughout California to resolve CAM billing disputes, defend against tenant claims, and, when necessary, pursue landlord counterclaims. Contact us today to discuss your situation.
