Michigan court rules that Taubman Centers must allow tenant audit of common-area charges. Another step toward CAM transparency?

In an environment of sluggish retail sales, cut-throat competition and squeezed margins, common-area maintenance (CAM) charges are under increasing scrutiny by tenants. And while many owners have made adjustments or at least (grudgingly) documented the costs behind CAM fees, Taubman Centers has taken a hard line.

But drugstore giant CVS Inc. is just as adamant in its position: If it's going to be assessed a fee for its share of mall overhead, then it wants to know exactly what it's paying for. The Framington, Mass.-based chain is trying to determine if it is being overcharged on CAM, and if it can prove that point, it will then seek a refund and damages.

CVS won an important victory in June, when a Michigan court ruled that Taubman must allow an audit of Taubman's fees as part of the discovery process. In Framington CVS Inc., et al V. Westfarms Associates et al, Michigan Circuit Court Judge Deborah G. Tyner ruled that CVS is entitled to detailed discovery to determine the “actual amount” due.

Perhaps even more significantly, she noted that based on previous court cases there was “a limited fiduciary responsibility” between the landlord and the tenant. That means Taubman has a responsibility to look out for its tenants' best interests in determining CAM charges, much like a trustee has an obligation to treat a minor with fairness.

“By saying that, this could have the impact of expanding the landlord's liability to the tenant,” says Sam Sultanik, co-chair of Hughes Hubbard & Reed LLP's real estate practice group. “That is very unusual.” Sultanik, based in New York, frequently represents developers.

Now, other Taubman tenants are likely to demand audits, too, says Bob Machson, whose New York law firm, Robert A. Machson & Associates LLC, represented CVS. CVS brought the action in regard to leases at seven Taubman Malls in Michigan, Connecticut, Maryland and Virginia. Westfarms, named in the suit, is in Hartford, Conn.

Taubman declined to comment on the matter. The company continues to fight a takeover battle with Simon Property Group and Westfield America and, if it ceases to be independent, the No. 18 mall owner would most likely adopt the policies of its new parent.

Meanwhile, across the industry, retailers are balking at inconsistent CAM charges, that they say, amount to an annual surprise. Some retailers, says Paul Kinney, director of real estate at ice cream chain Friendly's and founder of the National Retail Tenants Associations, are even leaving malls and shopping centers for freestanding space to avoid these payments. “I'm not doing any new mall deals right now because it's just too expensive, because of extra charges,” he says.

Some landlords are responding to tenant concerns by implementing a flat CAM, which includes a base rent and fixed tenant-occupancy charge. That eliminates the haggling over additional charges.

“At some point in time it will make sense to go to a gross rent system, where the CAM is included in the rent,” says Kinney. “We come up with one lump sum for CAM charges and move forward.”

Corey Bialow, real estate director for The Vitamin Shoppe, says most of his stores are in strip centers, which charge a lot less for CAM than a typical mall, which can have 15 percent administrative costs. “In a million-square-foot mall, landlords can hide pennies here and there that add up to thousands upon thousands of dollars in additional income,” he says. Lots of tenants still have questions. And for that reason, says Kinney: “CAM is an issue for all retailers and will be for a long time.”

The next step for CVS depends on the results of its audit. The retailer could be dragging Taubman into court again for damages if it isn't happy with how its money was spent.