Jan 06, 2021

6 Tips When Auditing Your Commercial Lease

By Don Catalano

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6 Tips When Auditing Your Commercial Lease
A commercial lease is usually one of a company's biggest expenses, and some businesses may be unknowingly paying more than is necessary to their landlords. After all, errors can occur with any document, including commercial leases. Conducting a commercial lease audit can help you spot mistakes that are increasing your occupancy costs, so that you can address them with your landlord and remedy the situation. Following these six tips will help to ensure a successful audit:

 

1. Examine Escalations 

Most leases allow landlords to raise rents periodically. During your audit, you should double check that any rent escalations that have already taken place were accurately calculated. If your lease allows for fixed increases at certain points in time, assessing the accuracy of escalations should be fairly straightforward. With leases that tie increases to a third party indicator, such as the Consumer Price Index, you will need to access historical data to determine when escalations were warranted and whether the amount of the increase matched the rise in the index price.

 

2. Go Beyond Rent

If your lease requires you to pay common area maintenance (CAM) fees, delve into the expenses that you have been assessed during the life of your lease. Was your percentage of the maintenance fees accurately calculated? Were all of the fees that you were charged appropriate, falling within the scope of terms of the lease? In addition to CAM, make sure that any portion of tax and insurance bills that you were responsible for were accurately billed.

 

3. Double Check Key Calculations 

Sometimes, landlords make mathematical errors when performing initial calculations for a lease document, so it's important that you crunch the numbers yourself. Double check that the rentable square footage for your space matches up with the actual square footage. If you're uncertain, you can have an architect measure the space for you. You should also examine the load factor used to determine your CAM expenses. With a full-service gross lease, you'll want to make sure that the base year was established correctly.

 

4. Approach Error Resolution Tactfully

Discovering an error during a lease audit is undoubtedly upsetting. Still, you need to ensure that you approach your landlord carefully. Give them the benefit of the doubt and assume it was an honest mistake. Focus on resolving the issue, not assigning blame. Your lease should spell out the procedures for how disputes with your landlord should be addressed. You may need to provide notification in writing rather than contacting your landlord by phone or email.

 

5. Revisit Market Conditions 

While you're drilling down into the fine details of your lease, take some time to re-familiarize yourself with commercial real estate market conditions in your area. In many regions, COVID-19 has greatly impacted the market, leading to increases in occupancy and decreases in rent rates. If you find this to be the case in your area, it may make sense for you to renegotiate your lease with your landlord. By agreeing to extend your term, you may qualify for discounted rent. This is especially true if your landlord has recently found themself with a lot of empty offices.

 

6. Enlist the Help of Professionals

Having experts assist you with the audit process can help to ensure the best outcome. An experienced accountant can spot errors that you may miss, while an attorney can advise you as to your rights for resolution. Tenant representative brokers can also assist with your market research and serve as your advocate during lease renegotiations.

 

Here are a few older articles we know you'll like:

10 Commercial Office Site Selection Tips

What to Avoid in Commercial Real Estate

Top Deal Breakers for Tenants in Commercial Real Estate

 

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Topics: lease audit

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Don Catalano

Don Catalano

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