While landlords and tenants of commercial properties may spend significant time and effort negotiating well-defined lease terms and conditions at the outset, certain economic terms may not be fully ascertainable at lease execution, resulting in possible billing errors.
As a primary example, future base rental amounts may be calculated later based on periodic rate escalations. Other variable charges, such as real estate taxes, may be adjusted from time to time, and other charges, like HVAC overtime charges, are perhaps measured by to-be-determined usage. Moreover, some highly negotiated leases may be subject to complex operating expense schemes entailing a list of not-yet defined costs that a landlord may or may not pass through to a tenant.
Future billing mechanisms to calculate amounts due later in the lease term present ripe opportunity for billing errors. These errors may go unnoticed or undisputed for significant periods of time and a tenant may otherwise pay erroneous amounts. However, tenants looking to later recover any overpaid rental charges should think again, as less-than-attentive tenants risk waiving their right to recover such overpayments under the voluntary payment doctrine.
The voluntary payment doctrine generally precludes the recovery of payments voluntarily made with knowledge of the full facts in the absence of a mistake of fact or law or some “bad faith” act on the part of the landlord such as fraud.
The doctrine, while seemingly harsh, is well settled. Courts have consistently applied it in a real estate context to bar tenants from recovering inaccurate lease charges where tenants paid such charges and had the ability to ascertain whether the charges were accurate or not, yet did not dispute them before or upon payment. Note that, under this doctrine, the kind of unrecoverable erroneous payments may not be limited to marginal overpayments as a result of a mere miscalculation. Under the voluntary payment doctrine, a tenant may be barred from recovering any amounts the tenant was never contractually obligated to pay under its lease in the first place.
In a 1986 New York seminal case adopting the doctrine with respect to commercial leases, for example, a tenant in a shopping center sued a landlord for restitution of charges paid by the tenant for weekend operating charges that were billed by the landlord in error and not otherwise expressly due and payable under the lease. The court declined to grant such restitution to the tenant. It found that the billing invoices submitted to the tenant clearly indicated the nature of the charges with specificity, providing the tenant with the opportunity to review and determine whether the charges were appropriate or not. However, the tenant paid these charges for years without dispute or even inquiry. In denying the tenant’s claim for recovery, the court indicated that the tenant demonstrated a “marked lack of diligence” as a result of its failure to dispute the otherwise erroneous charges.
This case and others underscore the weight courts will give to the level of diligence exercised by a party in determining whether the voluntary payment doctrine applies. The level of diligence undertaken by a party goes directly to whether the payment was voluntary. In assessing such diligence, courts may look to the sophistication of the party and its access to information in order to evaluate its rights with respect to payment obligations. Courts have generally signaled that where a party has a contract such as a lease outlining its payment rights and obligations, the party should have been able to evaluate whether it was contractually required to make the payments so demanded.
In a 2006 decision, a New York court ruled that overpayments were voluntary where the tenant not only actually made the payment for the demanded charges, but also made no inquiry into whether the payment was actually required. Under the lease in question, the tenant had the ability to audit or review certain records with respect to those charges. The court refused to grant the tenant recovery of overpayments made as a result of a miscalculation of certain tax escalation payments where the tenant had negotiated its own lease and the lease set forth the calculation method for tax escalations, yet the tenant simply failed to ever review the provisions of the lease and compare them against amounts being billed. Similarly, in a 2015 decision, a court declined to allow a real estate investor to recover overpayments as a result of, among other things, the court’s finding that the investor had enough experience with this type of agreement to know what should have been payable.
These cases demonstrate that courts have a low tolerance for pure lack of oversight on the part of a tenant where the tenant otherwise had the wherewithal to determine the accuracy of charges and neglected to do so. Of course, payments might not be deemed voluntary where charges were passed through by a landlord on a “bad faith” basis. Nevertheless, short of fraud, misrepresentation of charges, or payments made under duress, the courts have tended to determine that payments were made voluntarily, especially when tenant had the ability to evaluate whether it was contractually obligated to pay and simply failed to exercise the proper diligence.
More recent cases have further distinguished the limited means a payor has to overcome the voluntary payment doctrine, emphasizing its fairly broad applicability. First, courts have set forth more rigid limitations on what constitutes a mistake of fact or law. As previously discussed, the use of the voluntary payment doctrine is not appropriate where the payment was made under mistake of law or fact. However, the fact alone of a charge being billed in error and so paid is not sufficient grounds to claiming the payment was made by mistake of fact. For instance, a plaintiff in a New York case decided in 2018 could not recover improperly assessed interest charges on the basis that it had paid such charges due to a mistake of fact. The court confirmed that the plaintiff could not have been operating under any cognizable mistake of law or fact where the billing invoice clearly enumerated the charges and indicated the purpose of the charges. Thus, a party’s receipt of a detailed billing statement clearly highlighting the charges will likely preclude the party from later contending that it made the payment reflected on such statement by mistake of fact.
Additionally, courts have been unwaveringly adamant that any dispute of erroneous payments must occur at or prior to payment therefor. Courts have consistently signaled that it may refuse to allow recovery of payments where the payments made in error are not challenged until well after payment is made. Several cases illustrate this. For example, in a case decided in 2006, a tenant was barred from recovering overpayments first challenged after 20 years of repeated payments of such charges. In a 2015 case, a payor was barred from recovering overpayments first disputed after nearly two years. In a case decided in 2018, a tenant was barred from recovering overpayments disputed two years after payment, and in another 2018 decision, a payor was barred from recovering overpayments made without dispute for seven years. Cases, both old and new, have made it clear that the onus is on the party that receives what it perceives as an improper demand for money to take its position at the time of the demand, and litigate the issue before, rather than after, payment is made.
While it is clear that protest must be made at time of demand, more recent cases have provided some guidance on what may constitute a proper challenge to the charges, in addition to a timely one. In a 2006 decision, a New York court concluded that a mere inquiry by a tenant to a landlord party as to the charges did not constitute a proper dispute of the charges. Additionally, in a 2015 decision, a court rejected a party’s claim that it protested overly assessed interest penalties where it sent an email to a payee’s agent stating, “Am I paying Dec. interest no matter what, this is not right” nor did a payor’s statement “conveying shock” of certain charges constitute a proper dispute to the charges. Conversely, another court found that a tenant’s protest of overpayments were appropriate where the payor, through its counsel, provided notice to payee that it had no obligation to pay certain amounts.
A few guiding principles may be gleaned from these cases as indicia of a proper dispute of overcharges. First, there should be some notice of the dispute and the substance and specificity of the notice matters. Courts have indicated that such notice should clearly assert that the charges are inaccurate or improper under the governing contract, or otherwise reserve the payor’s rights to dispute the payment. Second, the method in which the notice of dispute is delivered may be indicative as to the appropriateness of the protest. Courts have barred a party from seeking recovery of an overpayment where the party claimed to have disputed the overcharges via telephone and also where a party could not show evidence of the medium through which it communicated its dispute of the erroneous charges. Third, it probably goes without saying that dispute of a charge must actually be addressed to the designated or appropriate contact person for the other party. The contract itself will likely govern notice requirements and tenants should take note of the same, as a 2015 New York decision cast doubt over the appropriateness of a notice disputing charges where the payor sent notice to a party affiliated with the payee but not directly to the payee as required by the contract.
While the voluntary payment doctrine has seemingly unfair consequences, it should encourage tenants to pay close attention to all billing statements containing rental charges. Namely, upon receipt of such billing statements, instead of routinely passing the statement onto the department responsible for payment, consider implementing a checks-and-balance mechanism whereby all (itemized) charges will be carefully reviewed and confirmed appropriate. If the charges appear inconsistent with the requirements of the lease, then tenants ought to promptly—and certainly prior to or along with payment—notify the appropriate landlord contact in writing and with specificity to challenge the requirement to pay the amounts so demanded.