Who Supervises the Property Management Company on a Triple Net Lease?
By Lee Segal, Segal Commercial
Commercial Real Estate Expert Witness
Commercial Real Estate Expert Witness
Real Estate Litigation lawyers should be aware of their client’s Property Management Company and what their responsibilities are in a Triple Net Lease and hold them accountable.
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. Provides 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.
ABOUT THE AUTHOR: Lee Segal
Lee Segal, President of Segal Commercial Properties participates in virtually every aspect of the commercial real estate industry. Mr. Segal specializes in expert witness counseling to commercial real estate litigation attorneys in breach of contract, mitigation of damages, environmental, brokerage disputes, property management, partnership disputes and lease interpretation. Lee Segal specializes in expert witness counseling to commercial real estate litigation attorneys in breach of contract, mitigation of damages, brokerage disputes, property management, partnership disputes and lease interpretation.
Copyright Lee Segal, Segal Commercial
Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer.For specific technical or legal advice on the information provided and related topics, please contact the author.