Businesses are always seeking ways to reduce expenses. Over the past 20 years, many companies have utilized lease auditing as a low-risk, high-yield way to reduce occupancy costs and improve their overall financial control of their leases.
Most leases contain operating expense “pass-through” or “escalation” provisions which allow the landlord to charge tenants for the costs (or increases in costs) of cleaning, utilities, taxes, insurance and other operating expenses.
A lease audit is an examination of these charges to determine if they are consistent with the lease. It is a comparison of billed amounts to lease provisions to ensure the tenant is not overpaying its rental obligations.
Landlords have difficulty managing differing pass-through clauses among multiple tenants in a building. Operating expense pass-through provisions are highly negotiated and can vary widely from lease to lease. Many landlords do not devote the resources necessary to tailor each tenant’s bill to each unique lease.
Lease clauses do not address unusual events that trigger increases in operating costs. As a result, tenants are often charged for items that they had no intention of paying for. For example:
Many leases provide that bills are “deemed” correct if not contested within a defined period of time (usually 30-60 days). Thus, not checking the bills can mean permanent acceptance of an incorrect charge. However, the greater danger is that accepting incorrect bills creates a precedent for how future bills are determined. This can result in a tenant’s unwitting acceptance of an incorrect methodology, further causing repetitive and cumulative overcharges for the life of the lease. Even a relatively minor error can become very expensive.
Example:
Landlords have been known to improperly charge tenants for the annual amortization of major capital projects. In a 10-year lease, the failure to object to an improper $20,000 amortization charge the first time it appears may give the landlord the right to include it for the remaining 9 years, resulting in a tenant overcharge of its share of $200,000.
Once overcharges are identified, recovering them requires significant additional time and expertise. Tenant claims for overcharges must be presented to the landlord in a clear, convincing, and non-adversarial manner. In addition, the tenant and its lease auditor must be able to develop constructive ways to resolve claims within the bounds of the existing business relationship between landlord and tenant.
Lease auditing services are offered on hourly, fixed fee or contingency bases.
Over the past 25 years, lease auditing has become a recognized part of the internal control procedures of many corporations, and is a valuable way for companies to control costs.
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Grossing Up Operating Expenses in Commercial LeasesYour Landlord’s CPA Certification is Not EnoughFailing to Audit Last Year’s Expenses Can Cost You Years of Rent Overcharges6 Reasons to Check Your Lease’s Operating Expense Bill
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