Exercising Your Commercial Lease Audit Rights

By Attorney Janet Portman

Your audit rights enable you to confirm the accuracy of the maintenance charges the landlord sends along to his triple net tenants. It's important to have an audit clause that covers key points, such as who performs the audit, who pays for it, and how you'll handle errors the audit uncovers.

Who Performs the Audit?

Some auditors work on a contingency fee basis—the size of their pay depends on the size of the irregularities they discover (who pays the auditor is covered below). These professionals are usually former property managers or other real estate pros who know exactly what to look for. The landlord may want to avoid using a contingency fee auditor, for obvious reasons. You can allay the landlord's concerns by suggesting that the lease specify that the auditor must be someone whom you both agree to use. You can even offer to designate the auditor right in the lease. You can also press for the use of contingency fee auditors, but suggest that you'll pay them on a non--contingency basis. Don't be surprised if the landlord still balks—the fact is, these contingency fee auditors are very good at their job.

How Quickly Must You Challenge an Overcharge?

If you suspect that you've been overcharged and bring in an auditor who confirms this, you'll want to challenge the expense. Your landlord will likely insist that any challenge to the expense be done very soon, even as quickly as 30 days after your audit, and that the audit itself be done within 90 to 180 days after you receive the landlord's statement of charges. The landlord's position is that allowing you to bring up a challenge many months after you've gone over the books will insert too much uncertainty in the landlord's accounting and may delay the closing of his books.

Fine, you'll say—as long as the landlord, in turn, agrees not to add any items to the ledger after the negotiated time period. But the landlord is liable to object to this proposal, since many items (especially taxes) are submitted to the landlord at irregular times and must be inserted into previously calculated expense sheets. Again, the impasse can be bridged by a gentle reminder that the law (the statute of limitations, which governs how long you have to file a lawsuit) in most states will allow you four years from the discovery of an allocation error to the date you must file your legal complaint concerning it. In view of this generous window, it's reasonable for you to insist on a two- or three-year complaint period.

Must You be Squeaky Clean to Exercise Your Audit Right?

Many landlords are afraid that a tenant who's behind in paying rent will use an audit as a fishing expedition, hoping to find something that can be used as an offset to the unpaid rent. Of course, it is entirely possible for you to be behind in your rent and for the landlord to have overcharged you, too. One way to allay the landlord's concerns is to agree that you'll pay your rent "under protest" and place the money in escrow, pending the outcome of the audit.

Who Pays for the Audit?

Because you've asked for the audit right, it's customary for you, the tenant, to pay. However, there's nothing stopping you from negotiating an understanding that if the audit reveals an overcharge higher than a certain percentage (say, 3% to 5%), the landlord pays for the audit.

Dealing with an Overcharge

If you find that you've been overcharged for something like insurance costs or insurance premiums and you've already paid the bill, you'll want reimbursement with interest. The landlord will want to make sure that an error won't give you the right to terminate the lease, which is a reasonable restriction. In the unlikely event that you and the auditor conclude that the "error" was really fraud, you'll normally be able to terminate the lease.

You Can Ask, But You Can't Tell

Most landlords will insist that the results of a successful audit be kept in confidence—in particular, you won't be allowed to share the information with other tenants in the building. The reason for this is simple: When the auditor finds an overcharge, the landlord will either pay it, dispute and refuse to pay the overcharge, or dispute it but agree to a settlement. If the landlord pays you anything, the landlord won't want to tip off other tenants by letting them know what this kind of error is worth in settlement. If you can live with the principle that it's every tenant for herself, there's nothing wrong with a provision that you keep the audit settlement confidential.

This article was excerpted from Negotiate the Best Lease for Your Business by Janet Portman