Franchise Tenants - Does Your Landlord Owe You Money?

Author: DaleWillerton@TheLeaseCoach.com

Date: MAY 28th, 2012

Topic: Industry Experts

As a franchise tenant, you will be accustomed to paying monthly rent. Your landlord, however, may owe you! Surprising as that may sound, franchise tenants fail to recognize this fact and could well be due (sometimes sizable) financial returns.

As The Lease Coach since 1993, I have been coaching and consulting with franchise tenants and helping them get money that is owed to them returned. This isn’t always easy and the process can take time and expertise (with knowing what to ask for and how to ask for it); however, I have frequently been very successful reuniting tenants with overpaid rent. Here are a few key problem areas for tenants where landlords are getting more than they are due:

Phantom Space: Most franchise tenants lease space and pay rent per square foot. So often the premises or area has not been measured properly and the tenant is paying for Phantom Space (essentially, area which does not exist). Even if the space measurement is off by a minimal amount, this will still greatly affect a franchise tenant paying rent over the long-term. Measurement discrepancies are common so make sure you have your area verified. It not only affects your base/minimum rent but also your Common Area Maintenance (CAM) costs.

Operating Costs: Operating Costs (also known as Common Area Maintenance / CAM charges) are the day-to-day management and maintenance expenses charged to the franchise tenants; examples include asphalt repairs, snow removal/landscaping, property insurance and so on. Franchise tenants pay a proportionate share of these costs based on the space they occupy. Therefore, if a franchise tenant occupies 12% of a building, he/she will pay for 12% of the Operating Costs. Paying by this said proportionate share is the industry standard but there are deviations for special circumstances for anchor tenants.

Nonetheless, every lease generally or specifically outlines what can or cannot be charged back to the tenants … but it’s up to the tenants to be watchdogs. A good industry rule of thumb is that an expense only qualifies as a legitimate recoverable Operating Expense if all the tenants benefited from the work (such as fixing parking lot potholes – but not replacing installing window blinds or painting walls for a tenant as an incentive to renew his/her lease).

I can tell you from first-hand experience that landlords and their property managers often take liberties and frequently make mistakes in charging back or recovering Common Area Maintenance charges from tenants. Practically every Operating Cost audit I performed (typically for a group of tenants in the same property) was riddled with discrepancies or chargebacks that should have been born by the landlord at the landlord’s expense or by a single individual tenant.

One of the most common discrepancies is when the landlord doesn’t pay for the Operating Costs attributable to vacant space. If the building is 12 per cent vacant, the landlord should be paying the proportionate share of Operating Costs attributable to that vacant space. The other tenants should not be required to carry the vacancy burden.

Deposit Refunds: If your lease agreement requires you to place a deposit for the initial lease term, it is not acceptable for that deposit to continue indefinitely. Ask yourself, are you a security risk? Have your rental payments been made on-time? If so, resist further security deposits for renewal terms and make sure you state this amendment in the renewal document. Otherwise, your deposit may be required indefinitely. The Lease Coach has been frequently successful negotiating to have the franchise tenant’s deposit refunded.