Do I Have To Pay Operating Expense Charges Or Taxes That My Landlord Just Billed Me For After Five Years?

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We’ve pondered, actually struggled, to post a piece exploring the answer to the often asked, “Do I have to pay operating expense charges or taxes that my landlord just billed me for after five years?” What we’ve found is that there is no simple answer if the lease in question doesn’t specifically cover delayed billings like this. That’s also true for related questions such as, “We never increased our rent payment after extending its term and now, five years later, our landlord wants all the back rent – do we have to pay?” Or, to, “We’ve been paying the wrong rent, can we get our money back?

[Let’s pause for an apology and an explanation. The Ruminations site was down for three days last week. We didn’t buy enough memory about two years ago when we started for all you and we have written since then. So, without warning, the site went down for “lack of memory.” Time and money cure these kinds of problem. So, with a service upgrade, at nominal cost, and three days of unsettledness, you can see us again.]

If this were a simple, harsh, “firm-rule society,” the answer to these and related questions would be relatively easy. Contractually incurred debts are enforceable until the “Statute of Limitations” expires. In most cases and places, that’s six years for transactions other than for the sale of goods (for which the nearly universal period is four years). Basically, if you fixed my car on March 1, 2008 in New Jersey, and I haven’t yet paid your $500 bill that was due upon completion, your law suit to collect the $500 can be “tossed” if I respond that you filed it after March 1, 2014, i.e., more than six years ago. Yes, I owe you the money, but the law has an “old and cold” provision, and that’s embodied in the “Statute of Frauds.” [The debt is still valid, but you can’t get a judgment against me. You might be able to offset what I owe against money you owe me. It’s complicated, so if this isn’t something you already know about, don’t think you do now that we’ve written it.

To continue – well, the problem with such a simple answer is that the Statute of Limitations provides an “outside date” for enforceability of debts. It is also riddled (in a small way) with exceptions that might delay when the period (say, six years) would begin to run, and some exceptions that might “toll” the limitations period, i.e., impose a “time out” during the (say, six year) period.

More importantly for the purposes of explaining why knowing how long the applicable Statute of Limitations period might be, there are a bunch of rules, more accurately principles, that courts use to effectively shorten the time during which these kinds of lease obligations are enforceable. Some derive from the lease or other document itself and others are “equitable” in nature.

There are times when readers can rightly accuse Ruminations of faineance, but that wouldn’t be accurate for today. We’ve plowed through case law (many times and over many years), and haven’t been able to discern a guiding principle. To us, the “justice” seems result-oriented. Of course, we can rightly be accused of seeing result-oriented justice around every corner, but today we think anyone else trying to reconcile the way the law treats the delayed billing question would have to agree with our conclusion.

What does Ruminations mean by “result-oriented”? Basically, it seems that courts balance the fairness of being confronted with an old bill, well after it should have been calculated and sent, against preserving the benefit of the bargain that is at the heart of contract law.

How do courts go about denying someone (usually a landlord) of the right to be paid what it would have been paid had it sent a timely billing? Well, “waiver” is always a good one – “You had the right to bill your tenant and because you didn’t (for far too long), you have waived your right to do so now.” The thought behind this denial approach is that the tenant’s “economics” relied on receiving bills for unknown amounts and when such bills haven’t been received for whatever a particular court thinks is “too long,” the tenant can distribute its earnings and need not have to hold money around to pay a bill that might never have come. For those who think this is a pretty weak “work around” from a court, try thinking it through in the case of a lease that says: “Landlord will send its billing on account of each calendar year by March 15 of the following calendar year.” We don’t think any court would bar a landlord’s claim for payment if it sent its billing on March 20, five days late. That’s because the tenant could rarely, rarely show it was prejudiced by a late billing. The dynamics of “prejudice” change as” time passes, memories fade, feelings change, people leave … .” [Abdul Basith].

Some might argue that most leases have a “no waiver unless in writing” provision. As we’ve written before, that doesn’t constitute a barrier when a court, in what it thinks are appropriate circumstances, rules that such a provision was orally waived. This isn’t the time to expand on how that works. Just accept that this is a time-honored and time-tested approach used by courts to “ignore” the effect of a “no waiver that isn’t in writing” provision.

Courts also apply such court-constructed, equitable principles such as “estoppel” and “laches” to deny recovery right to the delinquent biller. There are two commonly accepted types of “estoppel.” They are, “equitable estoppel” and “legal estoppel.” Where courts say that a landlord is “estopped” from pursuing a late billing claim, it is often thought those courts are applying “equitable estoppel” because the principle behind “equitable estoppel” is that it “wouldn’t be fair” to let the landlord lull its tenant into thinking nothing was still owed from five years ago, and then let it pounce. Technically, “equitable estoppel” doesn’t apply to the common late billing (by reason of mistake or oversight) because there are actually “rules” for when the legal principle applies. One of the requirements is that there has to be “fraudulent intent.” Just like with a chain, even if all but one of its links (elements of the equitable estoppel defense) will support “the weight,” the chain will fail (i.e., the defense will be unavailing) if one link won’t support the load (i.e., one element of the defense is not satisfied).

So, we think courts are applying some form of “Estoppel by Acquiescence.” Most readers will never have heard of this term, though they’ve seen it in application many times. That’s because it is usually seen as in the following example. Someone leaves a package at a place of business. The business sends “good” notices to the owner that if the owner doesn’t retrieve the package or otherwise respond within 30 days, the package will be treated as having been abandoned. The notices are received; and 30 days is a decent time under the circumstances. The period passes and the business throws the package in the trash. A week later, its owner comes by to pick up the package. The owner sues. The owner loses. That’s because of “Estoppel by Acquiescence.”

How does that apply here, when it comes to (very) late billing? We think the request for reasonably timely billing is “implied” by the courts and the failure of a landlord to send reasonably timely billing is regarded as acquiescence on the part of the landlord to the tenant’s implied position that there are no outstanding charges.

What about “laches?” “What is this thing,” some readers might ask. Basically, it is the judicial system’s way to say that six years (or whatever period of time the applicable Statute of Limitations might specify) is too long in a specific situation. “Laches,” when applied, always shortens the time an obligation may be enforceable. It is applied when a court believes someone has sat on her, his or its rights too long and doing so prejudices the other party. “Prejudice” is in the eye of the beholder, actually in the eye of a judge.

What does this all add up to? How does Ruminations answer the original question of: “Do I have to pay operating expense charges or taxes that my landlord just billed me for after five years?” We always say, “Show us the lease.” Then, almost always, after finding no succor in the lease, we continue, “We have no idea.” That’s the street equivalent of the more formal: “It depends.” Either way, whether a tenant asks the question or a landlord asks its “form” of the question, one outcome of getting a judicial response to the question, to be sure, is that the lawyers’ bills will be promptly tendered.

Given that one objective of good drafting is to avoid future uncertainties, i.e., let the parties find their answers inside the document itself, we suggest the following.

Decide when “too long” is “too bad.” Yes, agree on a “private” “statute of limitations.” We suggest four years. That’s what almost all agreements for the sale of goods use in the United States because that’s what Article 2 of the Uniform Commercial Code provides for in the absence of an agreement to the contrary. It works for millions of contracts, why not for a lease?

[Ruminations now anticipates the howls that can now be heard from those who offer a tenant only 30 or 60 or 90 days to inquire about, or contest, a billing. We think that’s wrong, very wrong. Why should a landlord (or a tenant, for that matter) get to keep money it wasn’t entitled to get in the first place?]

Four years isn’t carved in stone. Under some circumstances, a two or three year cut-off period wouldn’t offend Ruminations.

The time period should cut two ways. Landlords should not be entitled to be paid for billings first made after the agreed-upon time period (or for claims about deficient percentage rent payments) and tenants shouldn’t be able to make overcharge claims (for operating expenses, taxes, wrongfully paid rent, etc.) after that same time period has expired.

What should the four (or three or five) years mean? We think it means that each party, respectively, waives any and all claims for money owed by the other if the claim has not been made by notice to the other party sent after the fourth anniversary of the last day of the calendar year to which the claim pertains. By way of example, as to operating expenses, claims for operating expenses incurred in 2010, regardless of when the reconciliation was due or originally sent (if sent at all) could not be pursued if the landlord did not send a notice to its tenant by December 31, 2014.

Today, Ruminations intentionally has not provided sample language. There is a reason for that. If any reader finds our proposed solution to be an appropriate (or at least interesting) way to have a ready answer to our opening question, “Do I have to pay operating expense charges or taxes that my landlord just billed me for after five years?” then the process of that reader drafting her or his own lease provision will help her or him “think it through.” You might think about establishing a bright-line after which no claims for anything, not just rent or additional rent items, can be made if notice of the claim had not been made by an agreed-upon date. We call that Ruminating. Readers can start with thinking about why we have chosen the end of each “calendar year” as the trigger point for the start of the limitations period.

[For those readers who weren’t able to access last week’s posting, “This Is A (Leasing, Sale, Loan) Deal. Why Have You “Gone Missing?” It generated some divergent views as reflected in the comments at the Ruminations site as well as on a number of LinkedIn Group discussion sites. It’s not too late to add your voice to the debate. Take a look by clicking HERE, and then let everyone else know where you stand on the issues raised.]

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Comments

  1. Robert Roth says:

    Great post as usual, Ira.

    A related question that may be covered in another post is what constitutes sufficient proof of a charge. I like to cover this, as best as I can, in the actual lease. For example, if a property within the City of New York has its own Block and Lot number, then the Real Estate Tax bill from the Department of Finance should be prima facie proof of the amount of real estate taxes. Just as people argue that a bill is “late,” they also argue over its accuracy for collection purposes. (Whether or not the landlord or tenant can separately challenge that bill is another matter.)

  2. “The time period should cut two ways. ”

    Having worked both sides of the fence, my observation is that unsophisticated tenants, most of whom fail to engage knowledgeable representation when it comes to negotiating the lease document, often are bullied by landlords (or their attorneys) to accept terms that do NOT cut both ways. i.e., landlords want the right to “reach back” – seemingly forever – while, at the same time, insisting that the tenant’s “reach back” rights are strictly limited.

    I find this patently unfair and always push back vigorously (when I am on the tenant’s side).

  3. Henry Pharr III says:

    Excellent post Ira!

    I find issues arising on TICAM charges on both sides of the coin with my clients all the time. Robert brings up a good point above. What constitutes adequate “proof” of a charge (and backup documentation) is often not covered in detail or even at all in some commercial leases. That leaves the parties at the mercy of the equitable theories you describe above. On the other hand, Tenant Audit Rights – especially with anchors – can often pose problems for the Landlord who is diligent, but is worn out by seemingly endless picking at the evidence of charges and whether some fall into the “capital Improvement” arena, which ALL tenants will refuse to pay for.

    I think the takeaway is draft carefully and thoughtfully, remain diligent in billing and BE REASONABLE folks! You will get a better result than if the black robe makes the decision!

  4. howard i. littman - forensic architect says:

    Excellent discussion… thank you.

    Still, as I was reading, there was an additional aspect I was watching for, but did not make it into the essay: the flip side of the issue. In part, this is because you didn’t clarify if CAM statements were not sent to the Tenant at all, or if CAM statements were erroneous (and the undercharges not discovered for 5 years). This can make all the difference.

    The ultimate objective is (? should be) a result that is fair/equitable.

    If the CAM statements were issued but erroneous, then fairness might hinge on whether this was the result of simple error/oversight or if there was any misrepresentation involved. I can envision both. The Landlord’s poor bookkeeping and contract administration protocol might be at fault (sloppy, but honest error). On the other hand, what if the Landlord intentionally held back on passing through certain charges, which might have seemed ‘high’ (or even outrageous) in a given time frame, with the already-formed intent of charging them later (when they might be more palatable)? The resulting analysis would be entirely different in the latter case.

    What if the CAM Statements were sent, and charges were incorrect (under-billed) – and the Tenant ‘knew’ this? For example, the Tenant might realize its ‘share’ of CAM’s based on SF was incorrect… or that there was a chargeable project that did not, for some reason, make its way into the CAM’s. Did the Tenant have a good faith obligation to tell the Landlord of the apparent under-billing? Would this not factor into how a court would evaluate the case? Depending on how obvious the under-charges were, would the Landlord be able to at least imply that the Tenant knew this was the case, and was hoping to ‘get away with’ not paying what was fair/equitable?

    Now, I am guessing that in your example the CAM statements were sent, but incorrect. However, what if the problem is that no CAM statements were issued at all – whether on purpose or due to oversight? Both parties negotiated the lease terms. Both knew there would be CAM’s. Both knew there would be annual (or more frequent) statements issued detailing the CAM’s. Does the Tenant, in ‘fairness’ have a good faith obligation to ask the Landlord why the annual Statement has not been received? Would this not be a factor considered by the court (i.e. did the Tenant ‘know’ CAM’s should be paid but remained silent, hoping the Landlord would forget, or that the error would not be caught until four-plus years passed)? Would this not be deception/fraud on the part of the Tenant – resulting in damage to the Landlord?

    These are only a few of the things that might apply… so this is surely just an appetizer. Thanks again for the thought-provoking write-up.

  5. Ira, how about avoiding court and moving into solution? Learn how a delinquent $500,000 CPI escalation dispute became a major win-win for landlord and tenant: http://napamediator.blogspot.com/2014/06/blog-post.html. Deploy a neutral negotiator who gets the business mission, restore relationship and make a profit.

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