Commercial Real Estate:
IN Focus

LEASE AUDITS RESULT IN COST SAVINGS FOR MANY OFFICE TENANTS

It is incumbent upon all office tenants to ensure that they are not paying excess rent to their landlord - especially during these fickle economic times. More often than one thinks, many tenants are unwittingly paying more than their original leasing contract requires them.

By Peter Shakalis

Called an ‘office lease audit’, this is an analysis of the rental and various escalation charges billed to the tenant to determine if they are correct and in accordance with the lease.

While some office leases call for an annual percentage increase in the tenant’s base rent in order to cover the cost of operating expenses for the landlord’s building, many leases allow for increases in building operating expenses over a predetermined base year to be passed on to the tenant. The costs are allocated based on the percentage of the space a tenant occupies in the building and include: the landlords cost of cleaning and janitorial services; common area electricity charges; insurance; repairs and maintenance; management & administrative fees; and other operating type expenses associated with running the property.

Over the course of a year a tenant will pay ‘estimated’ yearly building operating expenses as stipulated in the lease agreement. This ‘estimated’ cost is then reconciled with the actual operating expenses at the end of each year, and then adjusted accordingly.

Errors in landlord billing can arise from a number of reasons not the least of which is that office leases today are complex documents often running over a hundred pages, with each page and word in the escalation, electricity, real estate tax and other clauses carefully negotiated by seasoned attorneys on both sides of the table. Hence lease clauses can vary substantially from one tenant to another in the same building since each is a function of the initial landlord/tenant negotiation. Most incorrect charges are due to the complexity of these lease documents and nature of the transaction rather than deliberate actions of a landlord. Small mistakes in the understanding of these clauses or when they take effect by the landlord’s accounting department can result in substantial billing errors.

Commercial tenants therefore should audit their leases on a periodic basis. Events may also dictate the need for a lease audit, such as when buildings are sold and new management and administrative people are brought in; if a building has had new construction and capital projects during the year; if tenants have expanded in the past and taken additional space with revised real estate tax and operating base years; if buildings are located in areas eligible for various governmental incentives; if tenants sublet from other tenants; or tenants that are approaching their lease termination date. This latter point is an important one since a refund due from the landlord can be used as negotiating leverage in renewal negotiations.

Tenants who sublease their space from other tenants should be careful that their sublessor is billing them correctly. Tenants that take on the unfamiliar role as sub-landlords are not acquainted with billing procedures in real estate, which can result in erroneous charges or the pass-through of incorrect expenses to their sub-tenants.

While it is the tenant’s obligation to identify billing expenses that they believe are incorrect, the lease will state a time period within which the tenant must act. In New York City, for example, it is not unusual for a tenant to have just 90 days to review and inform the landlord of a disputed bill. If more than 90 days elapses, the tenant may waive its right to the claim and forfeit any monies that it might have over paid.

Most major real estate companies including First Service Williams will offer this service to office tenants, usually on a contingency fee basis so that the tenant has no out of pocket cost.


Peter Shakalis is a Director at
FirstService Williams Real Estate
pshakalis@fswre.com

©2009 NEOCORP MEDIA


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