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Proportionate Share Adjustments: Tenants Beware of Costly Calculations
Most retail and shopping center leases contain a provision ' which appears fair and reasonable on its face ' to the effect that the tenant's proportionate share of the center or retail area is fixed at a certain percentage, eg, 35%. This percentage is then utilized by the landlord for the purpose of calculating the tenant's contribution to real estate taxes, common area maintenance expenses, and insurance premiums incurred by the landlord in operating the center or building. However, it's not always simple to calculate that share. For example, assume a theater tenant negotiated a lease in a center under construction, which provided that its proportionate share of the center was 35.2%, based upon the detailed plans and specifications for the center then in existence. Upon completion of the center, the tenant was presented with a statement by the landlord advising that the theater occupied 50%. In addition, when the theater tenant was negotiating the lease, it was advised by the landlord that its share of the common area maintenance charges was estimated at approximately $250,000. The bill the tenant received for its share of common area maintenance charges for the first year of operations was approximately $3 million. How could this happen? And how can you prevent this from happening? Read on.
The lease in question provided that the tenant's proportionate share was “35.2% subject to adjustment as provided in Section 2.10.” One might assume that the referenced section would set forth a simple provision to the effect that if the physical size of the center or the size of the theater increased or decreased from that which was set forth in the plans, the tenant's proportionate share would be adjusted accordingly. That certainly would be fair and appropriate. However, what the referenced section contained was a detailed description of what was to be included in the term “Floor Area” for purposes of measuring the size of the center and the size of the theater. The section set forth in great detail what specific areas were to be included and excluded in the measurements. Unfortunately, the definition was far from clear. For example, the lease stated that “in measuring the Floor Area of the center or aggregate rentable portions thereof (including the Leased Premises), there shall be excluded therefrom (i) the square footage area of any Common Areas and project areas, circulation areas, 'back of the house,' kiosks situated in Common Areas, mechanical space and other non-public areas. … ” Other than Common Areas, none of the referenced areas were defined in the lease.
When the center commenced operations and the actual amount of operating expenses became known to the landlord, (thereby causing the center to operate at a loss), the landlord decided to look to the only successful tenant in the center, the theater, to pick up as much of the additional operating costs as possible. This could be achieved by increasing the theater's proportionate share of the center relying upon the text in the lease that defined how the tenant's Floor Area, and therefore the tenant's Proportionate Share of the center, is to be determined. With the ambiguities in the lease, it was not difficult for the landlord and its professionals to “remeasure” the center so as to place the burden on the tenant.
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