I Just Got A Tax Or CAM Bill Three Years Late

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A common question we get (or see) has to do with very, very late billings for taxes or common area charges. Though one would think that a landlord would be anxious to send timely, periodic bills, for some reason, some don’t. If any reader can explain the advantage a landlord gets by sending a bill for three years of charges in one fell swoop, please do so. Otherwise, we’ll continue to think it’s crazy. If nothing else, tenants and leases turn over. Go chase a tenant whose store or even whose business closed years earlier.

It’s also an unfair burden to tenants. They deserve to have currently-billed charges. For smaller tenants, getting a super-size bill is a psychological and economic shock. The money made two or three years earlier has been spent or re-invested. For many, it’s a choker. For large tenants, ones with lots of resources, it’s no big favor to have gotten three years’ “free” use of money. Large tenants have budgets, even at the store level. Managers have received bonuses based on store profit. Hitting the bottom line in the current year for what should have been spent two or three years earlier is really unwelcome.

So, what’s to be done? The easiest thing for a landlord to do is to send bills or send reconciliations, as the case may be. Leases should provide for estimated monthly payments. A few tenants may object during lease negotiations but such periodic payments are really appropriate (Ruminations thinks). After all, the money is spent over time; so should the reimbursements. People could reasonably argue that tenant reimbursements for taxes shouldn’t be made on a monthly basis because the underlying real property taxes are usually paid once a year, in some locations – twice; others – quarterly. But, it shouldn’t be a big deal. Tax reimbursements aren’t extremely big numbers and the cost of money factor isn’t either. Smaller tenants are benefitted because monthly estimated payments serve as a budgeting device; they avoid the shock of getting one big bill to pay in 10 or 15 days. Large tenants with adequate cash reserves don’t face the “Wow, here’s the bill” challenge. If they aren’t amenable to making (or indifferent as to) monthly tax payments, holding out for writing their checks just before or soon after the landlord’s tax bill is due or paid is appropriate. Landlords should be willing to take the payment risk because if a tenant can’t pay the billing when presented, that tenant has stopped or is about to stop paying the much larger monthly rent.

Given that we’ve not yet said anything most readers already don’t know (other than to express our view about the propriety – even advisability – of monthly billings), do we have anything new to say? Well, we think we do, and here it is.

Tenants with bargaining power (however gotten) often negotiate for a limitations period. A typical business point is that if the landlord fails to furnish a bill within two years after some point in time, the obligation to pay the money otherwise owed is waived. So, if an annual billing is due three months after the end of each calendar year, the cut-off date would be two years and three months after the end of that calendar year. There are two things we rarely see in these clauses. One is that time should be made of the essence so that the landlord can’t argue to a court that a delay caused no harm. The other, appropriate in the case of reconciliations, is that no provision is made for tenant overpayments. Perhaps what is good for the goose (tenant) is good for the gander (landlord). Though tenants usually make no periodic billings to their landlords, they may want to bill for (permissible) self-help costs. For that reason, landlords agreeing to a time limit for billing should ask for reciprocity.

Does delay increase the risk of harm to a tenant, the party being asked to pay? It depends on the quality of the landlord’s records and the items being charged. Time corrupts, but not equally. Taxes are least affected. Generally, they are simple to confirm, both in amount and whether they have been paid. That’s because they are public records and, now, the information is usually available online to anyone. Insurance payments are also simple to verify because the invoices and policy information would be in the hands of the landlord’s broker, but are not openly available. Landlords would have to allow access. Common area charges are the most difficult to verify, perhaps the most complex. Paid invoices may be available, but records as to whether the services were actually rendered to the subject property or to a number of commonly-managed properties may not be available. Landlord-staff members with knowledge of “what was done” may no longer be employees. So, especially as to such common area charges, the longer the billing is delayed, the greater the chance of prejudice to a tenant’s audit right.

But, what about tenants without bargaining power? Unless prepared to belly up to the bar (or bank) when a big bill arrives, there is no law that says they can’t ask for a bill when the bill is overdue. Behaving like an ostrich does not serve as a defense when facing eviction or a collection lawsuit for non-payment of that big bill. Even better would be a lease clause that says that if the landlord doesn’t furnish a bill within 30 or 60 days after its tenant send a notice that the called-for billing is overdue, the amount owed will be waived. To us, that’s fair. The landlord should abide by a lease provision calling for periodic billings. It has received a notice and a reasonable time to prepare the “forgotten” bill. So, why not? Though some may have included this or a similar scheme in their leases, we’ve never seen it done. Why not?

Another option is to include a lease provision allowing for installment payment of overdue billings, perhaps monthly over a year. Perhaps, the payment period should be scaled according to the lateness of the billing or the size of the bill. We think this also balances the equities as between a tenant and a landlord who had the ability to send a timely bill but didn’t. Another concept would be to require payment of the oldest year’s bill within 10 to 30 days and the rest over time. To us, that seems more appropriate than calling for the newest year’s bill first because that amount is usually higher and the tenant had no “signal” as to what the periodic, annual increases had been.

Oh, though most readers already know, if the lease doesn’t set a “limitations” period beyond which a landlord can’t sue for non-payment, a state’s “statute of limitations,” often six years will govern. But, when does the limitations period begin? Usually, it begins from the date the debt is payable. And, when a lease says that payment is due 10, 15, 30 or “??” days after the tenant receives the bill, the landlord gets to sue (or evict) within the six (or some other number of) years after the “??” days have passed. That’s why leases with an “internal” limitations period should measure that period from when the billing was first due, not from when the payment is due.

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Comments

  1. For many small, mom & pop tenants, a delayed billing of any significant amount might be a sizeable burden (even if prudent business practice were to have encouraged that they budget for anticipated expenses that are described in the lease – which most will not have done.) Therefore, the need for some lease language to level the playing field such as you have described is that much more important for a small tenant in order that they not be blindsided by a large rock dropping through the hull of their small boat and sinking it. Unfortunately, few small tenants invest in the services of skilled lease negotiators to build protections like these into the lease because: (i) they don’t know how important their lease is and, therefore, don’t consider engaging adequate representation; or, (ii) they don’t like or trust attorneys; (iii) or, they don’t want to spend the money for an attorney; (iv) or, they hire an attorney without the appropriate lease negotiation skill set; or, (v) they don’t have, or believe that they don’t have, the leverage to put a skilled lease lawyer up against the landlord’s counsel. The shame is that, for these and other reasons, most small tenants NEVER avail themselves of appropriate representation when it comes to negotiating that all-important contract.

  2. The article talks of small tenants and the impact of disorganized landlords. Often the landlords themselves are also relatively small companies and being a landlord is incidental to their “main” business – the business that created the wealth and gave opportunity to own commercial real estate. This process of becoming commercial landlords is actually quite common.

    Those “informal” landlords typically do not have the business systems in place, nor the experience in commercial leases to even know the extent to which they are not meeting performance requirements. The owners have invested in real estate as part of their investment portfolio, but neither they nor their existing office staff have any real experience in managing commercial property or net leases. Their management consists of an ad hoc arrangement of external professionals who are engaged for discrete events: a lawyer to review a lease, an accountant to file the corporate returns, and a realtor to sign a new tenant. However the core management leadership is almost entirely missing.

    I’ve written about this phenomenon more extensively here https://cressblue.com/formalizing-business-processes-with-asset-management-software/ if anyone is interested in a more in depth explanation.

    In my experience no one is intentionally bad at management. Typically it is a lack of having specialized commercial lease and property management business systems.

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