Are Extensive Repairs Necessarily ‘Capital Repairs’?

Are Extensive Repairs Necessarily ‘Capital Repairs’?



Common area maintenance (CAM) charges can be a source of strife between commercial property owners and tenants. One common problem arises when a tenant thinks it has been incorrectly charged for CAM, and the owner believes that the charges are accurate. So-called “capital improvements” are especially controversial because tenants typically don’t want to pay for them since the improvements will benefit the property long after the tenant has moved out. A recent Delaware case highlights the importance of nailing down what types of repairs count as capital improvements, and what types routine maintenance, even if that routine maintenance ends up being somewhat substantial.

There, the owner of a shopping center sued a tenant for breach of its lease. The owner had charged as part of common area maintenance (CAM) a prorated amount that it had to spend on fixing potholes in the parking lot and installing signs limiting the parking lot to customers. The owner classified these repairs as maintenance. Under its lease, the tenant was responsible for its share of maintenance at the center. The tenant argued that these were “capital improvements,” not maintenance, and didn’t fall under CAM. But a Delaware district court ruled in favor of the owner.

The court found that the charges for pothole repairs and installing parking signs were properly classified as CAM charges. The court said that the charges for the pothole repairs fall within the plain meaning of “maintenance,” which “logically includes the act of restoring the common parking lot, after parts of it decayed or were otherwise destroyed.” The court said that it appreciated the tenant’s concern that an excessive amount of pothole repairs in a given period of time may be beyond the scope of what would be considered general repairs or maintenance, but that there was no evidence supporting this contention. The repairs at issue concerned approximately three or four potholes located in different areas of the parking lot, and were not so extensive that they could be thought of as a total restoration of the parking lot—that is, a capital improvement.

Some tenants had complained that individuals were parking their cars in the lot for protracted periods of time without patronizing any of the shopping center’s businesses, which limited the amount of spaces available to actual customers, and rendered the parking lot “less productive and operational” than expected. Installing the 30-minute-limit signs, however, ensured that the parking lot is functioning properly and is being utilized for the shopping center’s businesses only, said the court. It concluded that installing the signs was a means of generally maintaining the parking lot so that it remained productive and operational. Thus, the charge for installing the 30-minute-limit parking signs was properly classified as a CAM charge [McGinnis Commercial Real Estate Co. v. Jankes, March 2016].

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