Ohio Kentucky

Commercial Lease Audits: Due Diligence Required

By Soniya Gokhale posted Jul 24,2016 09:28:13 PM

  

  

 

 

Understanding the Commercial Lease Audit

Commercial lease audits can be beneficial & impactful catalysts for savings in Corporate Real Estate and for End Users trying to reduce their organizational occupancy costs. On the other hand, for many Corporate Real Estate Managers and Directors of Real Estate who are balancing key transactions, projects and corporate initiatives, Lease Audits can be time prohibitive, protracted, and can have the potential to 'muddy the waters' with tenant-landlords relationships.    Thus, the key in launching Lease Audits for End Users is to do some pre-audit due diligence and ascertain if substantial benefits will be yielded for the organization or if perhaps the outcome would not merit the time & effort entailed by a Lease Audit.

Commercial leases that have been well negotiated by a Tenant Broker on behalf of the End User should contain language which allows the tenant to request a review of monthly charges.  'True ups' should be done on a recurring basis to ensure that assessed charges match up with the lease and supporting documents or invoices from the Landlord.  There's no doubt that commercial leases are highly complicated, often lengthy documents. Consequently, it is not uncommon for errors to occur by End Users in calculating their liabilities under the Lease.  Given that many leases also include clauses which require Tenants to reimburse their share of building expenses, and that there can be room for debate as to HOW to define a Tenant's 'fair share', or to how to define the expenses that must repaid to the Landlord, it is easy to see how errors can be made by both Tenants and Landlords alike!

If a lease contains a clause which gives Tenants permission to request an audit, the audit is typically performed by a third-party company that is deemed mutually acceptable to the landlord and to the Tenant. Customarily, if the lease audit finds a discrepancy in the Tenant's favor, the landlord will pay for the audit and refund the overcharges. However, if the audit finds a discrepancy in the Landlord's favor, or no meaningful discrepancy at all, the Tenant could end up paying for any errors in the Landlord's favor and for the cost of the audit.

Given all of the above information, commencing a commercial lease audit campaign requires pre-audit due diligence by the Tenant.  It is prudent to be selective in launching a lease audit and to identify sites with leases whereby there are likely to be errors or aberrations.  

Some 'red flags' which can be identified by Tenants/End Users in determining audit-worthy leases:

  • Leases where occupancy costs are higher than projected or continue to increase year over year

  • Leases with complicated reimbursement clauses, rent escalation clauses or both

  • Leases in buildings that have experienced shifts in occupancy and where Tenants are responsible for paying their share of common building expenses

  • Leases with landlords & managers that have historically made errors in lease calculations

  • Larger Office leases

 

Ready, Set,...Audit.....

After identifying the appropriate lease to audit, it is important for the Tenant to understand all of their rights in the commercial lease audit.   An experienced Lease Audit firm or professional in this area is worth engaging to offer expert guidance and oversight in this process.   Such a service provider will assist the Tenant in notifying the Landlord of the intention to audit.    Customary terms and conditions upon launching an audit include compliance with confidentiality among other things.  If done strategically and with careful consideration, lease audits are excellent tools for End Users/Tenants to help control portfolio wide occupancy costs.   Most importantly of all?  If Landlords understand that a Tenant is prone to audit more frequently, Landlords are going to be more diligent in getting their calculations right the first time!

 

 

 



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