"TENANTS: RESERVE YOUR RIGHT TO
Anthony F. Collura
Vice President, Lease Services
When negotiating the terms of a new
lease, it is important for tenants to include language specifying
their rights regarding lease expense audits. Leases that are silent on
this subject are generally preferable to those that include
limitations and do not preclude a tenant and/or their representative
from conducting lease audits. However, if the subject of expense
review is broached, then the inclusion of an audit clause in the lease
avoids a potential misunderstanding of the tenant's rights to receive
and review detailed information on the landlord's building operating
and common area costs.
The following is suggested audit clause
language and possible negotiation points.
Recommended Audit Clause Lease Language
Section ___, Verification of
Operating Statement. Landlord shall furnish Tenant such
information as Tenant shall reasonably request to verify Operating
Expense and shall cooperate with Tenant in verifying the Operating
Statement. The Operating Statement shall be rendered by Landlord to
Tenant within one (1) month after calculation of such Operating
Expense by Landlord. The payment of any Additional Rental by Tenant
shall not preclude it from questioning the truth, correctness, or
completeness of any Operating Statement. Tenant and its authorized
representatives shall have the right to audit Landlord's records
with respect to Operating Expense. In the event Tenant's audit
discloses discrepancies, the appropriate adjustment shall be made,
and if such discrepancies result in an overcharge to Tenant that is
in excess of 2% of the annual billing to Tenant for such item(s),
Landlord shall also reimburse Tenant its actual out-of-pocket costs
of such audit. In the event Tenant shall dispute any Operating
Statement and the parties cannot resolve their differences within
two (2) months thereafter, then the matter shall be referred to
arbitration as provided in Section ____.
The above lease language is tenant friendly
and some negotiation may be required if the landlord objects to the
one-sidedness of this audit clause. Negotiation points would include:
Limit the amount of time that tenant has
from the receipt of the Statement to do the audit. We recommend
not less than one year but obviously prefer to keep it open.
Anthony F. Collura Vice President, Lease Services CRS Lease Specialists
Increase the percentage of error required
before landlord has to reimburse for the cost of the audit.
Limit the cost of the audit, i.e.,
"not to exceed $5,000".
Take out the reimbursement of audit cost
entirely (last resort if the two above compromises are not
Limit the number of years available for
audit, i.e., the previous three years' statements.
We also recommend some type of dispute
resolution provision, such as arbitration. While it rarely comes to
that, it does act as a preventative measure against stalling and is
usually less costly and time consuming than litigation.
The prudent tenant will protect himself by
ensuring his right to audit expenses, as well as arbitration or some
well-defined mechanism to resolve disputes arising from that audit.