Commercial leases often contain provisions that assign repair costs incurred during the term of the lease to either the landlord or the tenant separately. For example, many leases often assign all repair or replacement costs concerning a property’s roof or foundation to the landlord while tenants are often responsible for all repair costs concerning their exterior signs, storefront, and interior walls and floors. However, some commercial leases also provide for arrangements where certain repair and maintenance costs concerning the property as a whole are passed on, or shared by, the property’s tenants in the form of “common area maintenance costs,” also known as “CAM Costs.”
To illustrate, a standard commercial lease for a shopping center may contain a provision which describes common area maintenance costs to include the following repair costs:
Costs Included in Common Area Maintenance Costs. As used in the Lease, the term “Common Area Maintenance Costs” means the total costs of all services provided by Landlord for the common or joint use and benefit of the tenants of the Retail Center and all items of expense relating to operating, managing, supervising, equipping, policing and protecting, lighting, repairing, replacing, and maintaining the appearance, safety and utility of the Common Areas in the same condition as when originally installed. Such costs and expenses shall include, but expressly are not to be limited to, the costs, if any, of the following: . . . (v) replacing and/or repairing miscellaneous items in the Common Areas; . . . (xiii) maintenance and repair of common utility lines, water pipes and systems, sanitary and storm control pipes and systems, and sewage treatment facilities; … (xv) periodic routine asphalt, concrete, roof, and plate glass repairs; . . .
When drafted correctly, such provisions serve to easily share certain maintenance and repair costs that benefit all tenants between the tenants themselves. However, issues may arise where the lease also contains provisions that exclude certain structural improvements, alterations, or additions from a property’s common area maintenance costs without clearly defining what costs qualify as “repairs,” as opposed to “improvement” or “alteration” costs. Fortunately, caselaw provides some guidance.
Courts have generally held that “repairs” envision the smallest scope of work and are intended to restore property, equipment, or material to its original state or condition. In other words, the purpose of a repair is to return property or equipment to its original, efficient operating condition; a repair does not seek to improve or better equipment past its pre-damage condition [1]. In contrast, an “improvement” or “alteration” generally encompasses a larger scope of work that goes beyond that of a repair and is undertaken with the purpose of prolonging the life of the property, increasing its value, or making the property adaptable to a different use [2]. For example, courts have held that replacing a damaged water main with a new and enlarged main is considered an improvement [3] while replacing the seal of a generator is considered an ordinary repair [4].
Although these definitions and examples do not definitively make clear what work will be considered an improvement or alteration from that of a repair, generally speaking, to the extent a landlord undertakes any work that modifies existing structural or engineering designs, incorporates new or different materials, or upgrades existing materials or structures, such work would likely be considered an improvement or alteration. Work that is undertaken merely to fix, mend, maintain, or replace broken, cracked, or otherwise partially damaged equipment or material to its pre-damaged condition would likely be considered repair work. However, as always, the best practice commercial landlords can employ to avoid such disputes is to include clear language in all leases defining potentially troublesome terms.
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[1] See, e.g., Red Star Yeast & Products Co.v. Commissioner, 25 T.C. 321 (1955) (stating that “[t]o repair is to restore to a sound state or to mend, while a replacement connotes a substitution. A repair is an expenditure for the purpose of keeping the property in an ordinarily efficient operating condition. It does not add to the value of the property, nor does it appreciably prolong its life. It merely keeps the property in an operating condition over its probable useful life for the uses for which it was acquired. Expenditures for that purpose are distinguishable from those for replacements, alterations, improvements or additions which prolong the life of the property, increase its value, or make it adaptable to a different use.”)
[2] See, e.g., Mendoza v. Clingfost, No. 12-08-00315-CV, 2010 Tex. App. LEXIS 1661 (Tex. App.—Tyler, Mar. 10, 2010) (defining an “improvement” as “[a] valuable addition made to property (usually real estate) or an amelioration in its condition, amounting to more than mere repairs or replacement, costing labor or capital, and intended to enhance its value, beauty or utility or to adapt it for new or further purpose.”); Ten-Six Olive v. Curby, 208 F.2d 117 (8th Cir. 1953) (explaining that an “alteration…denotes a substantial change, while repair means to restore to soundness or work done to keep property in good order.”).
[3] See, Jerrel v. Board of Suprs., 247 Iowa339 (1955).
[4] See, Hartford Fire Ins. Co. v. Westinghouse Electric Corp., 450 N.W.2d 183 (Minn. App. 1990).
