Franchisee Real Estate Lease: Common Area Maintenance (CAM)

Common Area Maintenance (CAM) is a provision in a commercial lease that requires the franchisee (tenant) to pay a portion of the costs associated with the upkeep and operation of the building's shared spaces.

Contact Neufeld Legal PC for franchising legal matters at 403-400-4092 / 905-616-8864 or Chris@NeufeldLegal.com

The complexity of the lease agreement for the commercial real estate that is used in the franchise operation can very easily equal, or even surpass, that of the franchise disclosure document and the franchise agreement, such that retaining the legal services of an experienced lawyer to decipher, explain and negotiate the commercial lease agreement and its schedules. And for over 25 years, we have been working with business owners, including franchisees, to understand and deal with commercial lease agreements that have been presented by landlords and are foundational to their business operations. To gain the most from our legal analysis and advice as to the commercial leasing arrangement, a franchisee would be well served to understand some of the most significant commercial leasing terminology, which we have undertaken to provide you with in-depth analysis.

Common Area Maintenance (CAM), also known as operating expenses, is a provision in a commercial lease that requires the franchisee (tenant) to pay a portion of the costs associated with the upkeep and operation of the building's shared spaces. This is a very common term in commercial lease agreements, particularly in triple-net (NNN) leases, where the tenant is responsible for property taxes, insurance, and maintenance costs in addition to their base rent.

The specific items included in CAM are defined in the lease agreement, and they can vary widely. Generally, CAM covers expenses related to the maintenance of areas shared by all tenants, such as:

• Exterior: Landscaping, parking lot maintenance (e.g., snow removal, repairs, lighting), and sidewalk repair.

• Interior: Lobbies, hallways, shared restrooms, elevators, and janitorial services.

• Utilities: Electricity, water, and gas for common areas.

• Administrative and Management Fees: Costs for property management services, security, and administrative expenses.

• Capital Expenditures: In some cases, the landlord may pass on a portion of the cost of major improvements, such as a new roof or HVAC system. However, these costs are often amortized over the useful life of the asset, and tenants should negotiate to exclude these from their CAM charges or cap them.

CAM charges are almost always calculated on a pro-rata basis. This means each tenant pays a percentage of the total CAM expenses for the property. This percentage is determined by dividing the tenant's square footage by the total rentable square footage of the building.

• Example: If a tenant leases a 2,000-square-foot space in a 20,000-square-foot building, they are responsible for 10% of the total CAM expenses. If the total annual CAM for the building is $50,000, that tenant's share would be $5,000 per year, or about $417 per month, in addition to their base rent.

Landlords typically provide an annual estimate of CAM charges at the beginning of the year, and tenants pay a monthly estimated amount. At the end of the year, the landlord performs a reconciliation, comparing the actual expenses to the estimated payments. If the tenant overpaid, they receive a credit or refund; if they underpaid, they owe the landlord the difference.

For a tenant, negotiating the CAM clause is crucial because these charges can be unpredictable and rise significantly from year to year. A key point of negotiation is the inclusion of a CAM cap, which limits how much the CAM charges can increase annually.

• Year-over-Base Cap: This limits the increase to a percentage of the CAM expenses from a specific "base year" (often the first year of the lease).

• Year-over-Year Cap: This limits the increase to a percentage of the previous year's CAM expenses.

Franchisees (tenants) should also carefully review the list of included expenses to ensure they are reasonable and relevant. For example, a franchisee (tenant) would want to exclude costs that benefit the landlord's overall business, like marketing or leasing commissions.

Naturally, how the concept operates in the specific context of the particular lease agreement requires experienced legal analysis, such that you make the most out of your understanding of the commercial lease agreement for your franchise. For such legal analysis and advice for your franchise and its commercial leasing arrangements, we welcome you to contact franchisee lawyer Christopher Neufeld at 403-400-4092 [Alberta], 905-616-8864 [Ontario] or Chris@NeufeldLegal.com to schedule a confidential consultation.

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Contact us via email at chris@neufeldlegal.com or call 403-400-4092 / 905-616-8864.