Lease Auditing and Lease Administration Case Studies
One of the most frequently asked question we hear is what should we do if the landlord won’t provide supporting documentation for the expenses billed. Like most lease related items, the answer to this question depends on your lease. The tenant in most leases is paying an estimated payment in advance to be reconciled (Trued-up) at year end. If this is the case, and unless the lease states explicitly that the tenant cannot audit or the tenant is not entitled to supporting documentation, then the landlord must provide support for the expenses it is billing. However, like most things, this is easily said than done. The landlord may come back and continue to refuse to provide such documentation, especially if they have something to hide. In this case, the tenant can notify the landlord that is it exercising its right to conduct an audit using an experienced lease auditing company that the landlord may know like Lease Administration Solutions. This often gets the landlord's attention because the last thing they want is an auditor going through their books. So they may give you some of the information requested to avoid the audit. Again, unless the lease is explicitly states "no audit rights or limits tenant's right to audit, and then the tenant has the right to verify landlord's billed expenses. If the landlord continues to refuse the tenant, and if the amount is significant enough, the tenant can file suit against the landlord which will require the landlord to provide such supporting documentation in detail to the courts in the discovery process. Another way to handle this is for the tenant to pay in good faith to the landlord what it feels it owes or what the landlord has supported and holds back the rest. This is done with a letter that specially states why the amount is short and requests the additional information. The landlord may default the tenant which brings the impasse to the same point where the tenant can now file suit against the landlord.
An office tenant who rents significant amount of square footage has a base year lease. The tenant moves in midyear but does not verify its base year expenses when received at year end. Three years later when the amounts exceeding the base year becomes significant, the tenant requests Lease Administration Solutions to perform a lease audit. After time consuming back and forth with the landlord, they finally allow the audit and the requested support for the base year calculations. The auditor immediately determines that the landlord had under stated the base year by moving large expenses to the following year, thus the tenant was getting doubled billed. In addition, the lease called for a 95% gross-up clause that was being calculated on the subsequent years but had not been calculated on the base year. Pertaining to the gross-up calculation, the auditor identified that the landlord was not allocating fixed cost and variable cost correctly and grossing up all cost associated with the operating statement. The client recovered $185,000 for 3 years.Note: The gross-up calculation is design to be fair for both the tenant and the landlord. If applied correctly the tenant gets the advantage of grossing up the base year if not fully occupied (This is beneficial on new or renovated buildings) and the landlord gets the advantage of grossing up subsequent years if the building in not fully occupied. However, because of the complexity of the gross-up calculation it is often calculated incorrectly resulting in the tenant paying too much in operating expenses.
A tenant is an inline store in a retail shopping center and is paying cost associated with a ring road located around the center. The shopping center consists of many inline tenants as well as several out parcels. Per the landlord, the outparcel’s were not required to contribute to the maintenance of the ring road because they were outside of the road, and only the inline tenants were to contribute. The tenant on an annual basis was paying $30,000 per year to maintain this ring road for expenses relating to maintenance, snowplowing, landscaping, etc. The lease stated that the tenant is required to participate in such cost, so the tenant never thought about verifying the cost. As part of Lease Administration Solutions review, the auditor found that expenses the landlord was billing for the ring road were fact correct. However, during the auditor’s due diligence, they found an REA agreement that detailed the amounts the outparcels were to contribute to the maintenance the ring roads. The landlord was confronted and the tenant received a refund of $90,000 stemming from overcharges relating to 6 years prior.