Apr 10, 2015

The Importance of the Commercial Lease Audit

By Don Catalano

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Commerial Lease AuditYour monthly payments to your company's landlords aren't as simple as they may seem. Typically, commercial leases require you to pay a mixture of rent and expenses. Calculating both parts of the payment can be a complicated process, making them open to errors. Given that, somehow, landlords are more likely to make mistakes in their favor than in yours, it is wise to periodically do a commercial lease audit and make sure that you're paying what you should.

A commercial lease audit is a detailed comparison of what you are paying to what you should be paying. Typically, the auditor will look at what is billed to you in CAM and triple-net charges and compare them to the building's actual expenses through the lens of what your lease says you should be paying. If the landlord is overcharging you, you should be eligible for a refund. Here are some tips to help you through the process.

Confirm Your Rights

Before embarking on a commercial lease audit, read your agreements carefully. Usually, leases contain a clause that allows you to audit the charges that you pay. However, without language authorizing it, the landlord doesn't have to let you audit.

There is a way around this, though. If you want to audit because you think you are being overcharged and your landlord won't let you, you probably have the right to bring the landlord to mediation or court. Either of those processes give you the right of discovery and are typically more expensive and less pleasant than being audited. The threat of going in that direction might be enough to get your landlord to let you audit.

When to Audit

There are two major situations that should trigger a commercial lease audit. The first is if the building's expenses are significantly higher than the estimate that was provided to you when you signed the lease or at the beginning of the year. The second is that you should audit if you learn that tenants in similar buildings are paying significantly lower operating expenses than you are. Either of these are essentially common sense.

In addition, if you have the ability to audit and the means to pay for it, periodically doing a commercial lease audit just to do one is also wise. First, you could find that you are overpaying. Second, you send the message to your landlord that you are always watching.

Paying for the Audit

Typically, you will have to pay for your own audit. However, you may be able to negotiate an agreement with your landlord that he will have to reimburse you if you find significant overcharges. Typically, a 3 to 5 percent adjustment for overcharging should be enough to trigger the landlord's responsibility to pay. A contingency fee based auditor -- who gets paid out of savings -- can allay concerns about initial cost, but many landlords are afraid of them simply because they are typically highly effective.

Getting Started

When you are ready to get started on the commercial lease audit process, it's always best to get some help. Your tenant representative can usually share information on what typical tenants pay in your area, letting you know if you have a potential problem. He may also be able to help you find an auditor as well as explain the business terms of your lease vis-a-vis your audit rights. After talking with him, it is usually time to engage an auditor and, if necessary, your attorney.

Other great Commercial Lease articles:

Importance of Commercial Lease Abstraction

Strategies for Commercial Lease Abstraction

Protecting Yourself from Signing the Wrong Office Lease

 

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Topics: corporate real estate, CRE, commercial lease audit, Commercial Real Estate Lease Audit, corporate lease audit, tenant lease audit

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Don Catalano

Don Catalano

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