Hello,

Every lease includes all kinds of fees and charges, many of which can be hard for a tenant to understand, particularly when being charged an additional "administrative" fee to boot.

In this newsletter we examine the problems of one tenant being charged such an administrative fee on top of the fees and charges for the landlord's services, even though no such administrative charge is permitted under its lease.

Sincerely,

Alan Katz

Mintz & Gold LLP 

I am writing this newsletter while on a flight to Minneapolis and remain astounded that airlines charge for luggage. It is as if you ordered a sandwich and got charged extra for the bread. And let's not forget about the additional cost for in-flight meals, earphones, seats with legroom, oxygen, etc.

Ahem, I suppose attorneys in glass houses should be careful, since most law firms charge liberally for "disbursements", such as telephone, faxes and copying. (Free self-promoting plug: to avoid this moral turpitude and because we are such exceptionally nice guys, Mintz & Gold only charges for actual out-of-pocket third-party disbursements with no mark-up).

As one might expect, leases also often "nickel and dime" tenants for all kinds of services, bringing to mind that rapacious landlord/innkeeper, the "Master of the House" from Les Miserables ("everybody loves a landlord... but nothing gets you nothing, everything has got a little price"...).

Many leases create a little monopoly and require that tenants use landlords for certain necessary services which could be more economically handled outside of the lease, such as changing light bulbs and cleaning. These charges have become accepted practice (other than in larger leases) and tenants primarily focus on requiring market pricing.

Some landlords also charge an "administrative fee, on top of the already overpriced monopoly service.

Recently, one of our favorite clients came to us because their landlord was charging a 15% administrative charge even though no provision of the lease allowed such fee. But when confronted with the lease terms, the landlord's response was that the fee was part of their "customary practice", implicit and not specifically prohibited by the lease. I realize that it is election season, but can everyone just start making things up?

The real irony is that although this tenant would certainly win on this point in court, and the supervisory fees over a ten year lease would be unreasonably high and improper (probably around $25,000 or $30,000), it may not be enough to justify the cost of litigation. And being in technical "default" could lead to a landlord claim that the tenant is not entitled to certain future benefits, such as a reduction in the security deposit or exercise of expansion or extension rights (not to mention being subject to accumulating late charges and interest). If not resolved, the accumulated charges could also be pulled out of the security deposit at the end of the term.

So what can a tenant do when confronted with improper fees or charges where the cost-benefit analysis does not make litigation a reasonable alternative?

We suggest the following six approaches:

• To the extent possible, specify the particular prohibition in the lease. It is not possible to think of and set out each possible landlord transgression. We all know thou shalt not kill, but it does not necessarily belong in your escalation provision. But do your best to be as specific as possible to avoid any wiggle room.

• Strongly resist attempts by ownership to charge fees outside the boundary of the lease terms. Refusal to pay such administrative fees and letters in protest from tenant executives and counsel can be effective in forcing the landlord to back down.
  
  Litigation will require a cost-benefit analysis, but may be worth pursuing, or at least commencing in the hope of reaching a settlement (it is amazing sometimes how being served with papers can jolt parties into being reasonable). One caveat: if you are a law firm tenant, it will likely not cost you too much to commence and even pursue litigation and the landlord will know this and may be less inclined to go down this road.

• Consider timing when you escalate the dispute. You should always record your displeasure up front, but you may wish to pay under protest until particular important milestones have passed. For example, if your security deposit will be reduced after the third lease year, you may want to wait until the reduction is in place. This only delays the inevitable conflict, but should be part of your calculations.

• Include prevailing party attorney fee provisions under your lease. These can be hard to obtain, but the requirement that the landlord pay your attorneys' fees if you are successful in litigating a dispute will tilt the cost-benefit analysis in your favor and may make a prudent landlord pull back once aware of your strong resistance.

• Include mediation or expedited arbitration/dispute resolution mechanisms in your lease. An objective third-party's input might show the landlord the unreasonableness of its position and a relatively quick and inexpensive option might alter your cost-benefit analysis.

• Be open to compromises that could benefit both parties. Despite the fun we poke at them, most landlords are not inherently evil. Sometimes these situations arise for no more sinister reason than that the landlord and/or its managing agent does customarily charge an administrative fee and nobody bothered to review the lease terms (or maybe they were just seeing if they could get you to pay for that headset).
  
  Mutually beneficial outcomes can arise in these situations. For example, you might be satisfied with a waiver of accumulated fees and charges to date, a reduction in the amount of the fee charged going forward and/or a reduction of the instances in which the fee would be invoked (i.e., allowing different vendors to perform certain maintenance functions - avoiding the need to pay $500 to change a light bulb might alone put you ahead).

Well, Mintz & Gold has turned off the fasten seat belt sign and you are now free to roam about our newsletter. Keep the suggestions above in mind if your landlord attempts to charge improper administrative fees and you can avoid some turbulence in your lease.