Keep Evidence of Owner’s Intent

Keep Evidence of Owner’s Intent

If the owner of space you lease insists that you’re responsible for certain items and you disagree, make sure you have evidence of what is known as its “course of conduct,” that is, the pattern it has used with you when enforcing your lease. In some cases, an owner’s course of conduct is the difference in a tenant winning or losing a lawsuit. 

A recent North Dakota commercial real estate lawsuit is a great example of a tenant using the course of conduct of an owner, among other evidence, to show that it wasn’t responsible for certain expenses. There, a national clothing retailer signed a lease for space at a shopping center. Later, when the center’s owner tried to charge the tenant for center expenses, the tenant refused to pay. The tenant claimed that the lease doesn’t require it to pay for heating, ventilation, and air conditioning (HVAC) expenses and a share of mall operation costs. The mall’s management company and owner disagreed. A district court agreed with the tenant, declaring that it has no obligation to pay for HVAC or common area maintenance expenses. The owner appealed. A North Dakota appeals court upheld the lower court’s decision.

The tenant offered two pieces of evidence that the parties intended that it wouldn’t be required to pay for center expenses. First, it emphasized the course of performance of the lease—for the first 10 years of the lease, the owner never charged the tenant for these expenses. This suggests that the parties intended to exempt the tenant from center expenses liability, said the appeals court, which noted that “a commercial landlord has incentives to collect money its tenants owe. Thus, the owner’s decision not to collect center expenses from the tenant suggests it understood the language of the lease to impose upon the tenant no obligation to pay for center expenses," said the appeals court.

Second, the tenant highlighted an April 2005 “Estoppel Certificate” that the owner sent to it. It states that the tenant’s monthly CAM expenses were “N/A [not applicable] per month.” It also states that no amendments or modifications had been made to the lease. It states that the tenant had an obligation to pay rent, taxes, and a percentage of its gross sales over a breakpoint. But it states no obligation to pay any center expenses or HVAC costs. The appeals court determined that the tenant estoppel certificate suggests that the owner understood the lease not to require the tenant to pay for center expenses. Together, the course of performance and estoppel certificate strongly support that “initial estimated monthly center expenses: $ N/A,” means that the tenant has no obligation to pay center expenses for the duration of the lease, the appeals court concluded [The Gap, Inc. v. GK Development, Inc., December 2016].