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Keep the lawyers out of it: How to get along with your tenants without going to court

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Let's face it. If property managers and tenants could work out their problems without getting their lawyers involved or going to court, they would. So what business practices should a property manager adopt to minimize tenant litigation while still properly administering a project? Here are three principles to use to achieve this: prevention, consistency and dialogue.

Far too often, disputes arise because of a mismatch between the parties' understandings on a particular issue. Property managers spend significant time arguing with tenants over non-monetary issues such as trash, hours of operation, noise, repair responsibilities and parking. Controversies over CAM calculations, tenant improvement reimbursements and other monetary issues can become expensive on both sides.

Kenneth Stipanov

Preventing these disputes starts with the initial contact with the tenant. Leasing agents must understand the expectations of the manager and owner and be able to communicate them to potential tenants in person. Any marketing materials must be consistent with those expectations. For example, in a retail center, leasing agents should not raise unrealistic hopes about what other tenants might go into the center, especially if the tenant is assuming that no competing uses will move in. Similarly, marketing brochures should not make overbroad promises as to how the center is going to look, how it will be maintained or how it may be developed.

Once the parties' expectations are controlled, proper documentation is essential. Use clauses, exclusives, options to extend, hours of operation, maintenance responsibilities, CAM calculations and such are hotbeds for disputes. The written lease is a place where a manager can make his attorney work herself out of her litigation practice by creating documentation that is clear and concise, and free of internal contradictions. Too many times a lease says one thing in the body, but a different thing in the addendum.

A property manager should have a good working relationship with his attorney. Although it is often inefficient to have an attorney negotiate and document every lease, the lawyer should be asked to provide a standard form lease, together with several standard add-on provisions for different situations that may come up. For example, the property manager should have at hand provisions or riders covering options to extend, free rent, tenant improvement allowances, sign criteria, and specific rules and regulations, all of which use the same definitions and approach as the lease and are drafted specifically for the project at hand. If one of the forms in the standard set does not precisely cover a situation, the manager should engage his attorney to draft specialized provisions that coordinate with the rest of the lease documentation, and conform to the real-life facts of the particular property. There is nothing like being able to point to a specific clause in the written lease to diffuse a dispute that a tenant wants to raise.

Part of managing tenant expectations is consistency in administration. Property managers are wise to be consistent among tenants, and among issues. Tenants will think themselves at liberty to bend the rules on use, outside storage, sidewalk sales, parking and other matters if they see other tenants abusing the same rules without consequence. Certainly a manager does not have to follow an inflexible regimen, but he shouldn't expect to be doing favors for one tenant without feeling pressure to do the same favor for other tenants.

Similarly, managers cannot adopt an inflexible position with respect to some requirements, and a laissez-faire attitude on others. Managers should keep their enforcement approach consistent throughout the various elements of the leasing relationship, even with the same tenant. For example, imposing late charges as soon as possible on monthly rent, but foregoing late charges on CAM and other reimbursements, sends a mixed signal that can lead to disputes on the same or other issues.

The best managers are consistent year-to-year. Adopting different methods of CAM calculation each year invites significant trouble. Similarly, consistency on how and whether to collect reserves or to amortize major expenses will serve to minimize friction over the long term.

Finally, even in the business world, emotions can be a deciding factor in whether parties end up in court. Effective managers encourage dialog between themselves and their tenants about problems and issues that may be coming up. Lawsuits that started out with a simple misunderstanding might have been avoided by an environment where the tenants feel comfortable and open discussing their businesses, needs and problems with the manager. The manager obviously can't be the neighborhood psychiatrist, but a few extra minutes on the phone can save hours of time and thousands of dollars of attorneys' bills.

Prevention, consistency and dialogue -- three business practices that can make life easier for property managers and tenants.

Stipanov is a partner with Luce Forward, Hamilton & Scripps LLP, and a member of the firm's Real Estate Practice Group.

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