March 2014

Who Supervises the Property Management Company on a Triple Net Lease?

Many owners elect to employ a property management company even though the Tenant is responsible for paying all of the expenses and maintaining the property. This method of utilizing a management company provides a good deal of comfort for the owner in not having to deal with the tenant and making sure that the rent is paid on time and all of the expenses are paid when due.

Listed below are some of the duties of the property manager:

1. Collection of Rent

2. Implement rent adjustments

3. Communicate with owner of any issues that surround the property

4. Pays bills

5. Issues checks to the owner or owners

6. Provide financial statements

7. Refurbishes property when vacant

8. Performs inspections

9. Builds a relationship with the tenant

I have seen in a few cases where the property manager, in a triple net lease, never enters the premises for an inside inspection. A reputable property manager should and usually does a drive by on a periodic basis but not necessarily enter the property.

In a case that I was recently involved in, there was a 20 year lease with a financially very strong tenant. In this matter, during the lease term, the tenant subleased the building in accordance with the terms of the lease. Further, two additional 5 year options to renew the lease were exercised until the termination 30 years after its commencement.

During the 30 years the owner of the building received his rent on time and did not suspect that anything was wrong at the building. Upon vacancy of the tenants it was determined by inspection that the building was grossly contaminated with hazardous substances. Further, it was never disclosed by the tenant and tenants' that there were hazardous materials used on the site.

Now the question arises who is at fault other than the tenants for this environmental mess?

Not being a lawyer, I would assume that the legal community in addition would look to the property management for damages. This may be the correct or most simplistic way of looking at who was to blame for this mess. It should be presumed that the owner paid a fee for good management and was sorely disappointed with the outcome.

Another way to look at this case is to take a look at the owner of the building. Did the owner have a role in supervising the property management company? My first impression with this case is simply that the owner had no responsibility of managing his vendor. Then as I was walking my dog the other evening, I was taking a good look at everyone's landscaping on my block. I found that most of the landscaping was in good shape but some landscaping, although maintained by professionals, looked poor. Therefore, who is responsible? In this situation, I feel both share in some responsibility.

As an expert witness, I find myself in a position to give my opinions on a daily basis. In matters of property management it may be what is in the contract that determines liability. But my bottom line answer is that there is a shared responsibility of management but it is definitely not equal especially when it is a triple net lease.

“We retained Lee to serve as expert witness for us in connection with a commercial lease transaction. He was very responsive, able to follow and take directions well, and he provided both myself and my clients with valuable insight and guidance. I have complete faith in Lee as an expert and I would definitely recommend him to other attorneys.”
Omar Yassin, Partner, Archer Norris