What is a Lease Audit
Lease auditing is a systematic process that examines leasehold expenses, billing methodologies and lease language in commercial leases. A lease audit can help verify that charges billed to you are accurate and in compliance with your lease terms. In commercial real estate, the cost of such errors can amount to thousands and even millions of dollars over a given period of years.
Types of Billing Errors
There are three categories of billing errors.
- Inadvertent Errors: treating expense items as pass-through costs to the tenant under the terms of the lease. Landlord charging for cleaning services that should be included under a lease.
- Calculation Errors: mathematical errors and/or the use of factors not specified in the lease. For example charging the wrong percentage of the building a tenant occupies.
- Intentional Errors: landlord’s conscious effort to treat expenses that are specifically excluded under the lease as pass-through expenses.
Increased Likelihood of Error
Tenants should audit their leases when one of the following conditions occur.
- A Change in Ownership may result in a change in the interpretation of lease clauses by a new landlord, the addition of new expenses or amenities, or the expensing of capital improvements that should be amortized over the term.
- A Change in Property Management could result in a new interpretation of the lease, the treatment of overhead expenses as pass-through costs, or less favorable economies of scale.
- Increasing Vacancies could affect a landlord’s gross-up of the lease.
Benefits of a Lease Audit
- Bench marking operating expenses by facility type and industry comparing current locations.
- Recovering over payments for landlord over billing
- Finding billing errors that permit the renegotiation of your current lease
- Highlighting unfavorable lease provisions for future negotiations
Compensation
Lease auditors usually bill in one of two ways: (1) on an hourly basis or (2) as a percentage (25-40%) of savings, typically based on past billings, not future savings.
