Limit Tenant’s Right to Lease Audit

When looking to cut costs, one of the first things that tenants try to trim are their operating costs. If a tenant believes that it has overpaid for its share of the building's operating expenses, a lease audit is inevitable for you. Your first step in preparing for audits should be at the lease negotiations stage. Insist on lease provisions that limit your tenant's right to inspect your books and records so that the tenant doesn't have free reign over the process. While you don't want to fight your tenant's right to a lease audit—because you could be accused of cheating or sued for an accounting—you still have to protect yourself if errors are found.

Prohibit Contingency Fee-Based Auditors

One of the biggest points in a lease negotiation for the owner is prohibiting the tenant's use of a lease auditor who works on contingency to perform the audit. These lease auditors get paid based on the amount of money they save for the tenant with the errors they find. Insist on a certified public accountant who is being paid on an hourly basis to do the audit. This is a major point that gets negotiated into lease audit provisions, says Rapkin, a shareholder at Akerman Senterfitt.

Another controversial issue is the threshold requirement for how much the owner should pay for the tenant's audit. For example, if the owner agrees to be responsible for reimbursing the tenant for the cost of the audit if its errors reach a certain amount, what will that amount be? How erroneous do the charges have to be to trigger the owner's obligation to pay? This is a critical number and one worth fighting for in the lease.

Usually, the owner and tenant agree on a percentage of the money, if any, that is owed to the tenant as a result of errors. Your best option is to negotiate provisions that make the tenant perform any audits at its “sole cost and expense.” For an example of this type of provision that you can adapt, see our Model Lease Clause: Negotiate Owner-Favorable Lease Audit Provisions.

Imposing a limitation on how often the tenant can perform a lease audit and whether the tenant can exercise its right to audit if it is in default are two provisions that limit your exposure to unnecessary delving through your books and records.

The most important thing you can do not just for lease audit rights, but every other aspect of a commercial lease is to negotiate from your form lease. To start with, an audit right won't be in your form. Some tenants are unaware of how lease audits may help their bottom line. It's up to the tenant to bring up the lease audit point, says Rapkin, and offer language that it is comfortable with. But remember to include an operating expense provision with terms on how these expenses are paid monthly and how they are reconciled at the end of the year.

Include Crucial Resolution Provision

When negotiating lease audit provisions, Rapkin likes to have a final and binding resolution provision to handle disputes. Without this provision, a disagreement about the audit could spark a lawsuit. Rapkin's provision dictates what happens if there is a dispute: If the owner disagrees with the audit results, the owner and tenant refer the dispute to a mutually acceptable independent certified public accountant who will work with them to resolve the discrepancy, and render a final and binding decision. Our Model Lease Clause includes such language. “This achieves finality without a lawsuit,” says Rapkin.

Regardless of the length of the provision, it should include what happens as a result of an audit's findings: If there is an overpayment, the owner pays the tenant back; if there is an underpayment, the tenant pays the owner; and if there is a discrepancy and the owner disagrees with the audit, it is handled in an agreed-upon way. “But just to say ‘once a year the tenant may look at the owner's books and records’ is not enough,” cautions Rapkin. This leaves open the issue of what happens if the tenant initiates an audit and finds errors.

Insider Source

Eric Rapkin, Esq.: Shareholder, Akerman Senterfitt, Las Olas Centre II, 350 E. Las Olas Blvd., Ste. 1600, Ft. Lauderdale, FL 33301; (954) 759-8962; eric.rapkin@akerman.com.

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