Are Property Management Fees Part of Triple-Net Lease?
Don’t blindly pay fees if you suspect that you aren’t responsible for them under the lease. Triple-net leases can be confusing to tenants who don’t have much experience with them. Under a typical "triple-net" lease, the tenant pays all expenses, including property taxes and insurance, maintenance, and utilities, leaving the owner with no expense associated with the property. But some owners insist on tweaking the typical “NNN” lease arrangement—which can leave you paying for expenses you didn’t agree to if you don’t understand your particular arrangement.
The tenant in a recent case involving a triple-net lease ultimately wasn’t responsible for management fees, but had to take the owner to court in order to clarify this. There, a bank tenant signed a triple-net lease for a standalone building in a shopping center. Under the triple-net lease, 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. The appeals court noted that the lease doesn’t expressly address responsibility for management fees. The tenant argued that the lease doesn’t contemplate management fees because the parties intended the tenant to manage its own premises. It further argued that the owner’s interpretation allows the owner to alter the terms of the agreement by unilaterally hiring a third party to perform administrative tasks that the tenant could do itself. The tenant contended that if the owner intended to hire a management company and pass along that cost to the tenant, it should have negotiated that term and specifically addressed it in the lease.
The appeals court agreed. It acknowledged 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.” But the appeals court said that the lease doesn’t require the tenant to reimburse the owner for the management fee it “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.
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].
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