Colorado Real Estate Journal - December 17, 2014

The over-under on disputed rent payments in commercial leases

Many commercial leases today provide varying methods with which to determine a tenant’s rent. A tenant’s rent can be based on the square footage of its premises or can escalate based on a fair market rental rate or the Consumer Price Index or may be based on some alternative calculation negotiated by the parties.

Determinations of a tenant’s share of common area expenses or a tenant’s percentage rent are often based on varying yearly figures. In each of these instances, the figures or the formulas used may be reasonably disputed between the parties. A landlord may claim that a tenant has underpaid its rent and demand payment of the underpaid amount, and conversely, a tenant may claim that it has overpaid rent and demand a refund of excess charges from its landlord. This article provides a brief summary of certain issues that are a consequence of those payment disputes, with an emphasis on the dispute that arises well after the date on which such payment was due.

Underpayment of rent. In cases of underpayment of rent, the relevant Colorado statutes are C.R.S. § 13-80-103.5(1)(b) and C.R.S. § 13-80-108(4). These statues provide, respectively, and in part, that all actions for arrears of rent shall be commenced within six years after the cause of action accrues and not thereafter, and causes of action for debt, obligation, money owed or performance shall be considered to accrue on the date such debt, obligation, money owed or performance becomes due. Courts have held that these statutes dictate that claims for monthly underpayments will be considered to have accrued on the date the rent became due, rather than upon the discovery of a contractual breach.

In some instances, a tenant may be able to assert that the landlord has waived its right to collect underpaid rent; however, case law is inconsistent on this issue. In one case, the landlord was found to have waived its right to recoup additional rent when it accepted rent for 2½ years without increasing the rent according to the formula in the lease and demanded the underpaid rent when the tenant requested the landlord’s consent to a lease assignment.

(Zarlengo v. Farrer, 683 P.2d 1208 [Colo. Ct. App. 1984]). The lease in that case had a nonwaiver clause, but without explanation the court dismissed the l a n d l o r d ’ s reliance on that provision, referencing an installment sale case, which held in part that an anti-waiver clause is itself subject to waiver or modification by course of performance. In another case, when a tenant exercised its purchase option, the landlord refused to honor it because of the tenant’s failure to pay certain increases in rent, notwithstanding that the landlord neither notified the tenant of any rent increase under the lease nor objected to the amount of rent paid. (Kimmick v. Santilli, 596 P.2d 1223 [Colo. Ct. App.

1979]). The court held that the landlord’s acceptance of partial monthly rent for 20 years without objection constituted a waiver of its right to rely on the tenant’s default as grounds for terminating the lease and denying the exercise of the tenant’s repurchase option; however, the court still required the tenant to pay the underpaid amount to the landlord.

Ultimately, Colorado case law suggests that where a landlord could have charged the tenant increased rent but failed to timely do so, landlords may be susceptible to the waiver defense. The waiver argument will be less successful in those cases where the tenant is solely in possession of the information necessary to determine the rent and the landlord could not have reasonably determined what was due.

Overpayment of rent. The issue of overpayment of rent, as it relates to the statute of limitations, generally appears to be a matter of first impression for Colorado courts. A Colorado court held in the early 1950s that a tenant who overpaid crop rentals to its landlord was entitled to recover the excess payments even though the mistake had been unilateral and without deceit or unfairness on the part of the landlord; however, that case did not address the issue of statutes of limitations.

Courts in other jurisdictions have examined the issue of whether a statute of limitations period applies to a dispute over the overpayment of rent and generally are split on their decisions .

For example, in New York a tenant brought an overcharge claim against the landlord arising from an escalation clause in the lease.

The court held that the tenant’s claim accrued upon its receipt of the landlord’s first yearly statement almost 12 years before the tenant commenced the action, which gave the tenant constructive knowledge of the landlord’s method for calculating the escalation payments under the lease, and thus the statute of limitations barred the tenant from recovering all overpayments. Yet in another New York case, the court held that a tenant did not have actual or constructive knowledge of the landlord’s methods for calculating the tenant’s escalation payments, and thus the tenant’s breach of contract and unjust enrichment claims accrued separately for each rent installment. In this case, the court upheld the tenant’s claims arising from rent installments that accrued within New York’s sixyear statute of limitations period, but not those that accrued outside of the statute of limitations period, and noted that a complete bar to challenging the method for escalation payments may be excessively harsh considering the costs involved and the average length of a commercial lease.

In other cases, states have applied what is known as the “voluntary payment doctrine” to prevent a tenant from recovering alleged rent overpayments, even within the applicable statute of limitations. The voluntary payment doctrine provides that one who makes a voluntary payment with knowledge of the relevant facts cannot later sue to recover the payment, even if there was no legal liability to make the payment. Colorado has adopted the voluntary payment rule, but it has not been expressly applied to cases of rent overpayment.

Regardless, under Colorado law, the payer can defeat application of the voluntary payment rule by showing payment under protest or duress or a mistake as to all relevant facts. Thus, if Colorado courts were to apply the voluntary payment rule to a tenant’s claim to recover overpayments of rent, that tenant still may have a viable defense in the event there are factual disputes regarding the rent calculations or methodology.

In sum, tenants should be diligent in keeping apprised of their rent payment amounts to their landlord, and landlords should verify that they are charging the correct rent amounts to their tenants. Rent calculations, increases and percentage amounts should be carefully analyzed against the lease provisions and properly applied and confirmed by both parties to avoid future disputes regarding the accuracy of rental payments.