What fits the bill?

The idea is apparently simple – any possible misunderstandings over the fees that should be paid can be avoided when lease contracts are being negotiated, with the terms and conditions precisely specifying the costs that can charged to the tenant. Well, that’s the theory. In practice, however, things are completely different.

Scale of the problem

According to auditing companies, most operating cost agreements in leasing contracts are unfairly disproportionate. “I’m not even talking about a range of 50–60 pct but a much higher scale than that,” says Wojciech Rogala, the CEO of Victoria Management & Development. “It’s not unusual for such errors to amount to several hundred percent to the disadvantage of the tenant, and cases of refunds amounting to tens of thousands of złoty per settlement are very common. Our record single refund, which has already been paid back to our client's account, was more than PLN 120,000.”

“I don’t agree that landlords imposing unjustified costs on tenants is a widespread problem,” counters Magda Derwisz, who has been managing shopping centres for more than twenty years. “Such situations occur and certainly shouldn’t happen, but it is relatively easy to detect them and obtain the appropriate refunds from the owner. In addition, I have the impression that those tenants who are not interested in the costs incurred and accept the annual payments without reflection, are in the minority. Companies involved in analysing fees estimate that about half of the errors detected are amicably settled, ending with the return of unjustly accrued or already charged fees. In other cases the tenants sometimes decide to go to court. Errors in settlements can go back several years, so even small amounts – after adding them up and adding the interest – can result in a significant refund.”

Sloppiness or bad will?

According to Wojciech Rogala, there are several main reasons for erroneous settlements, with the unprofessional attitude of those (whether they are the owner or an external company) responsible for calculating the costs being the most common. “For example, this could be due to poorly calculated proportions of tenants, costs that are not in line with the catalogue of rental costs and that are not subject to billing, or incorrectly calculated property taxes and perpetual usufruct fees,” explains Wojciech Rogala. Another common mistake made by management companies is the lack of ongoing verification of the data entered into the computer programs regularly used to calculate the costs. The correctness of these data (regardless of whether they were inputted by people currently managing the centre or by their predecessors) can often be left unchecked for years, resulting in the duplication of the same mistakes each time. Another reason is the flexible and broad interpretation of ‘management costs’ or ‘administration costs’. “This is a very difficult cost item to be verified because the costs assigned to it result not from the catalogue of rental costs but from the terms of the agreements between the owner and the manager,” adds Wojciech Rogala. “In theory, the tenant has no grounds to challenge the total costs, but after a detailed analysis of individual invoices we often find costs that absolutely should not be transferred onto the tenants. Can spa cards or amusement park tickets for employees of the centre’s management be justified as any kind of function of the centre’s management? Is it not disgraceful that management companies force tenants to pay for their New Year dinner expenses or for birthday cards for their employees? Unfortunately, there are many such examples that are very difficult to identify without a detailed analysis of individual cost items. “There is considerable scope for misunderstandings, for example, when it comes to the repairs carried out in the shopping centre,” points out Magda Derwisz. “Restoring the function of a building or device can be counted as renovation work and this means that tenants could be charged for it. However, improvements or renovations have to be counted as related to fixed assets and as such are clearly the cost of the owner. The situation is problematic if the repairs cannot be performed – or are unprofitable – without even a partial modernisation. Then the qualification of this cost is a discretionary matter, so it requires an agreement between the tenant and the landlord,” Wojciech Rogala adds. But Magda Derwisz is also no stranger to absurd situations – such as when a landlord charged all the tenants for the debt collection from those who were late with their rent. As a result, the tenants who paid on time had to pay for those who paid late.

The fees for energy and water bills constitutes another aspect of the problem. And in this case mistakes are also made by managers. “Regardless of whether there is insufficient knowledge of the technical structure of the building or the installations used in the relevant areas or whether they are simple arithmetical errors, eventually this leads to the significant irregularities that we find in individual cases,” claims Wojciech Rogala. “Owners can often add their own margins to the payment, although they have no right to do so,” adds Magda Derwisz. “One way out of this situation is for the tenant to sign a separate agreement with the utility supplier, although of course this is not always possible,” she admits.

The power of the powerless

Why are tenants unable to check whether the fees are accurate and fair themselves? There are several reasons. “When we look into the accuracy of fees, we meet up with the facility managers and visit the companies’ headquarters, but our questions are often dismissed with banal answers or data that do not contribute anything to the final verification,” complains Wojciech Rogala of Victoria Management & Development. “We can certainly understand those tenants who – when trying individually to verify the correctness of the fees – give up trying to clarify their doubts at this stage. Not only do they not get satisfactory answers, but they are urged to settle the payments at the same time,” adds Wojciech Rogala. Much also depends on the size of the company. The task of verifying fees occurs once a year, so employing people to thoroughly analyse the costs – especially in the case of a small or medium-sized tenant – is not economically justifiable. Small tenants are too focused on running their own businesses, selling their products or services, so often they don’t have enough time or knowledge to take on this challenge. Larger chains, although they often have departments that deal with checking the fees, are also sometimes helpless. “Access to a shopping centre’s invoices is not always easy, especially if they are collected by an external management company and a single bill for the administration is issued to the owner. Then the costs for the centre are the costs of the manager, who may not want to share the accounting documentation,” explains Magda Derwisz.

All the tenants we asked about billing issues agreed that the problem exists. Among the issues that concern them are the raising of costs, which, according to many, is made at the discretion of the owner/manager. Further doubts relate to inequalities in the treatment of individual tenants and charging them with the service charges for vacant premises. Furthermore, the representatives of retail chains point out that there is a shortfall in the transparency in the billing due to the lack of verification opportunities. Tenants would also like to be informed of exactly what the landlords spend the fees they collect on and how they manage this. The fact that tenants are constantly raising such issues is not a good sign. Clearly defined and precisely recorded maintenance costs are necessary for there to be good relations between the tenant and the landlord. However, none of our interlocutors agreed to disclose their identities. Representatives of the chains explained that they did not want to enter into open disputes with landlords for a variety of reasons, but mainly because this could provoke a negative reaction. One worry they had is that of not being able to expand their operations due to obstruction from the owners/managers of the centre.

Contracting the issues

Many of these problems could be avoided at the lease negotiation stage, for instance, by including in the contract the tenant’s right to inspect the shopping centre’s cost invoices – although this depends on the balance of power and the negotiating position of the tenant. “Larger owners usually have a standard lease agreement that a smaller tenant can take or leave. Retail chains – especially those with large-format shops – are often in a stronger negotiating position; but, on the other hand, in their case even the smallest error has a much bigger impact because of the scale of their operations,” admits Wojciech Rogala of Victoria Management & Development. “Most of these problems could be avoided by including the relevant provisions in the lease agreement. Another option could be flat-rate fees, leaving the landlord responsible for all the costs. And an alternative to that could be to decide upon a coefficient for calculating the fees, thus avoiding any discrepancies in the annual billing,” suggests Magda Derwisz.

A note from the authors:

Our investigation of this issue has taken several months, but the question of whether we should examine this problem at all and then publish anything about it was equally taxing for us. The main reason was the fact that we knew in advance that we would probably never be able to access the source materials, as they are by nature confidential, and would instead be forced to relate the opinions of the third parties representing tenants or owners, thus presenting extreme points of view. Ultimately, however, we decided that sharing their concerns with our readers would be a valuable exercise. We would also like to take this opportunity to thank all of those who agreed to talk to us (often anonymously).