Why do I need a lease audit firm to check my bills?

Correcting landlord billing errors requires specialized skills. To find errors, you must have accounting expertise as well as in-depth legal knowledge of lease clauses, of how your building operates and of how your landlord computes bills for its tenants. Unless you have a block of concentrated time and extensive resources, you will not be able to identify errors other than the most obvious ones. In addition, to convince your landlord that the errors must be corrected, and do so without adversely affecting your relationship, you also need very effective communication and negotiation skills. Unless you know how to communicate with your landlord’s accountants at their level, you will not be able to retrieve your overpayments.

Using a third-party lease audit firm significantly increases the amount of savings achieved and simultaneously reduces the potential for tension in this area.

For a more detailed discussion on what to look for in a lease audit firm, please see KBA’s Lease Tip, "Criteria for Selecting a Lease Audit Firm."

How can the timing of my lease audit affect the results?

Most leases require the tenant to bring errors to the landlord’s attention in order to receive rent adjustments. In fact, if the tenant does not do so, it is deemed to accept the bill as rendered and the landlord may keep any overcharges. Therefore, the timing of a lease audit can determine if a landlord is required to correct errors that are found.

To comply with these clauses, the tenant must follow a detailed notification procedure specified in the lease. This procedure includes time restrictions—the tenant often must give its notice within 30-90 days after receipt of the bill—as well as restrictions regarding the content of the notice. There are a number of common variations, many of which are detailed in our Lease Tip, “Audit Deadlines Come in All Forms.”

Be sure to check your leases for these limits, and pay particular attention to what you must do to comply with them.

Do I have the right to audit my lease?

The simple answer is, in most cases, yes. Many leases grant tenants the right to review the books and records of the landlord to ensure that the charges billed are correct. These clauses often state that the tenant has, upon reasonable notice, the right to visit the landlord’s offices and review the applicable accounting records. In addition, every tenant has a general contract right to ensure that the bills received are correct.

For a more detailed discussion of this issue, please see our Lease Tip, Negotiating Lease Audit Rights

How will auditing my lease affect my relationship with my landlord?

Although some landlords may prefer that their tenants not audit their leases, most landlords realize that tenants are required by corporate governance rules as well as by their internal audit departments to ensure that all lease charges are consistent with the contractual obligations (as established in the lease). As lease audits have become more prevalent, most landlords today see them as a normal part of lease administration, especially given the fact that without conducting these reviews, there is no way for the tenant to verify its costs.

One of the best tests of how well an audit firm preserves its clients’ relationships with their landlords is the incidence of litigation over lease audit claims. A high incidence of litigation indicates that the firm is unable to persuade landlords of the validity of its claims, and the failure to effectively articulate positions.

For a more detailed discussion on how to maintain fairness in a lease audit, see KBA’s Lease Tip,"Due Diligence: The Foundation of Lease Auditing."

What are the most important skills to look for in a lease audit firm?

The most important skills to look for in a lease audit firm are:
  • Level of expertise in analyzing and interpreting lease clauses
  • Proven history of recovering money from landlords while preserving landlord-tenant relationships
  • Ability to integrate client needs and preferences in the pursuit of claims
  • Ability to discern weaknesses in lease structures and lease administration practices, so that appropriate and effective steps can be taken to correct them going forward.
The more the lease audit firm can offer in these four critical areas, the greater the benefit will be to your company.

For a more detailed discussion of this issue, please see KBA’s Lease Tip, “Criteria for Selecting a Lease Audit Firm”.

How can I avoid rent overcharges in the future?

Controlling real estate occupancy costs requires continuous diligence.

Although lease auditing can recapture overpayments your company may have unwittingly made, it doesn’t prevent overcharges from recurring, and it usually only addresses the larger locations. In order to prevent overcharges, a company must implement a regimen of constant monitoring of lease costs for all of its locations. It must also adopt a process by which it continuously improves its lease language for new transactions.

Constant monitoring of lease costs requires that each occupancy-related expense be verified and authorized by a qualified employee. In order to do this effectively, the employee must have ready access to the underlying legal documents, must check each and every expense against the documents and must have the ability to effectively question charges that appear incorrect. Although ready access to lease documents can be achieved through an effective lease administration system, in many companies these charges are authorized in the field by people who do not have access to such a system and therefore have no means to verify whether the amounts charged are truly due. Furthermore, if after checking a charge against the documents a question is raised, the person approving the bill must have know how to challenge it within the guidelines of the lease. If the person cannot effectively do this, then checking the charges against the documents becomes nothing more than an academic exercise.

In addition to checking bills against the legal documents, a good way to reduce costs in the long term is to constantly improve lease language. In many cases, a tenant may be charged for something that is clearly inequitable, but nothing can be done about it because the lease is inartfully drafted and the landlord is not legally required to withdraw its charge. Tenants should adopt a procedure to incorporate and re-write into its standard lease documents the lessons learned from its lease audit experiences (and from those of other companies).