So you’ve signed a lease as a tenant; months of bargaining with landlords, lawyers and brokers have resulted in a complex document that establishes what you will and will not pay for. The lease then provides that although the landlord agrees to not charge you for certain things, if by some accident it makes a mistake, it is your duty to find it and ask for a correction. This self-imposed shift of responsibility takes all the teeth out of what you fought for when defining your payment obligations.
But wait– it gets worse. Not only must you find and point out these errors, most tenants voluntarily agree to do so within a very short window. Although the tenant by law has multiple years (6 in New York) to bring billing errors to the landlord’s attention, many tenants have acquiesced in allowing these limits to be shortened to as little as 30 days! The result? Not only do tenants have the onus to notify their landlords of billing irregularities, but now they have vastly shortened time periods to do so! A somewhat common example of such a provision is as follows:
Any Landlord’s Reconciliation Statement (the “Statement”) sent to Tenant shall be conclusively binding upon Tenant unless, with 30 days after such Statement is sent, Tenant shall send a written notice [which must follow the lease’s Notice provisions] to Landlord objecting to the Statement and specifying the respects in which the Statement is incorrect.
Commercial tenants should be receiving their 2011 operating expense and tax reconciliation statements from their landlords by no later than the middle of Q2 2012. These reconciliations are essentially accountings of the actual 2011 expenses compared to the estimated expenses paid in 2011.
These receipt of these statements starts the clock on the time limits within which a tenant must notify its landlord of errors, and as stated, the failure to raise an issue by the prescribed deadline means the expenses in the statement are “deemed” conclusive and become binding on the tenant, regardless of how blatant or obvious they are.
The difficulty for most tenants is that it often takes up to 30 days just to pay the bill, and for a tenant to do all that is necessary to identify potential overbillings and then explain them in a notice to the landlord is a near-impossible task. Furthermore, for tenants with multiple leases, managing these audit windows can be a nightmare.
Solution #1 – Stop Giving Away the Store!
For new leases, we strongly we urge tenants, attorneys and brokers to steer away from unreasonable restrictions on the tenant’s ability to verify its charges. Given that the tenant is doing nothing more than ensuring compliance with the parties’ agreement, the tenant should have as much time as it reasonably needs to identify and present errors. No tenant should voluntarily give its landlord the ability to keep funds that should never have been billed in the first place, simply because the tenant did not find them in time.
Balanced Lease Audit Language*
In order to verify the accuracy and validity of the charges set forth in the Operating Statement, the Tax Statement and any other charges imposed on Tenant for Additional Rent (collectively, the “Charges”), Tenant shall have the right, upon reasonable written notice to Landlord and at Tenant’s sole expense, to examine or have Tenant’s representatives examine the records as are relevant thereto, including the general ledger, escalation worksheets, invoices, canceled checks, contracts and other supporting records (collectively, the “Records”). If after its review Tenant disagrees with the Charges, Tenant may send a written notice to Landlord of such disagreement specifying in reasonable detail the basis therefor, the amount it claims was not due and the amount of any refund it is claiming.
Solution #2 – Manage Your Critical Dates
For existing leases, the first step is to organize them in a way that makes such time-based restrictions easy to track. A “best practices” approach is to automate a critical date reminder system that alerts the appropriate parties of such restrictions at predefined intervals. For that reason, we encourage lease analysts, brokers, administrative staff etc. to research point solutions in the form of lease administration software to accomplish this task (visit www.capterra.com or www.softwareadvice.com for an overview of the lease administration systems market).
Solution #3 – Act within Your Time Limits
Tenants should establish protocols to check each lease immediately upon receipt of the reconciliation statement. Follow these steps:
1. Locate the audit rights provision in each lease. It will prescribe the amount of time you have to object to the charges on the bill and how you must proceed with an audit of the landlord’s books and records.
2. Thoroughly review the statement against your lease before contacting the landlord and effectively beginning an audit.
a. Review operating expenses like base year adequacy, pro-rata share calculations, allocation of expense pools, expense stops, exclusions and passthroughs, caps, capital expenditures, management fees extraordinary charges, sundries, after hour HVAC, freight elevator usage and all CAM components.
b. Review base rent issues like per square foot rent calculations, CPI calculations, rent commencement issues, subtenant chargebacks, tenant improvements and other credits.
c. Check real estate tax billings for refunds, tax certiorari proceedings, improper inclusions and improper allocations.
d. Check utilities and electric expenses for application of rates, proper schedules, surcharges, correct meter allocation and reading, and usage assumptions.
e. Create trend reports and compare data to similar markets.
f. Analyze the sufficiency of lease language with respect to all of these areas and identify areas of prospective exposure.
As you can see, it is somewhat inappropriate to saddle the tenant not only with the burden to identify errors, but also to do so in a vastly shortened time period. This is particularly evident when you consider the fact that landlords have no such obligation. In other words, the landlord can retrospectively charge its tenants for underbillings it discovers at any time during the life of the lease. Tenants should at least feel comfortable demanding a little quid pro quo- if the tenant has 30 days to catch an error or forever hold its peace, the landlord should operate under the same restriction.
If you have any questions about how to set up such a process to better control your total cost of occupancy, please do not hesitate to give us a call, or visit our website at www.kbalease.com.
*NOTE: This clause is not intended to provide legal advice, and parties are urged to consult with their respective legal counsel prior to using it.
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