Does Your Landlord Have His Cake and Yours?

Published on Friday, 15 November 2013 09:55:33    Written by Marc
We often talk on our blog about things to remember when entering into a lease. Although managing leases can seem straightforward to many, for people who are in the field day in and day out negotiating leases and managing real estate portfolios for companies and organizations, the work is often much more technical that outsiders would think.

Does the Landlord Have His Cake and Yours?If you take care of numerous real estate sites for a company, people take for granted that all leases will be signed on time and that they will be negotiated with terms that are suitable for them. People also expect you will get the best price possible for the best location and site that is on the market so that in itself makes a lot to deal with. Because of this, it happens often that some technicalities are not flagged during the lease negotiation and seem to appear only later when doing a lease audit.

In some cases, these items come from legitimate clauses in the lease, which may have been overlooked at the time of lease negotiation. If it’s too late to catch and you already agreed to the terms of the lease, then better to put this as ‘experience’ and try not to repeat the error in the next lease negotiation. However, for other items that you might find during a lease audit, they can fall in the ‘grey zone’ which means that the landlord is not really going against the lease but result in something you would never logically agree to when negotiating the lease.

For example:

Suppose you lease an office space in a large office building and decide to conduct a lease audit on the site, simply to see if the landlord is recharging only what he/she is allowed to recharge according to the lease. During the audit, you find that the landlord is making good revenues on the underground parking which is public and for which the landlord sells day passes.

Now, this is the landlord’s parking area and it is mainly for the public that comes to the shopping center, which occupies the entire first floor of the office building, so it is normal that the landlord collects daily fees from people parking there. Then you look at the tenants recharges in details and find out that the landlord is recharging the cost of the underground parking to all tenants in the building.

Since there are two parking areas, one for the public and one for the tenants in the office building (for which the landlord charges monthly fees), all costs to maintain, heat, secure, light the two parking spaces are including in an account named parking maintenance and recharged to all tenants. You ask for more details from the landlord and you get confirmation that you have read correctly the financial statements. The landlord is collecting revenues from selling day passes to the public on one side and getting back the cost to maintain that parking area from all tenants in the office building, without any of them getting any benefit from this. In addition, to add insult to this picture, the landlord is adding an administration fee of 15% for the management of that public parking space. That is like having his cake and eating yours.

Obviously, no tenant would accept that, but unfortunately, few add clauses to prevent this and often end up arguing with the landlord only once they manage to flag this in a lease audit. Providing they actually do flag it during the audit, as landlords do not go out of their way to detail some costs that they would prefer you do not question too much.

Fortunately, the vast majority of landlords are honest and do not go out of their way to hide costs, but since the people doing the leases, those managing the operations of the buildings and those doing the accounting are from three different departments, the example above happens often without the landlord even doing it on purpose.

Over the past 20 years, I have negotiated thousands of leases, and each time when our commitment was significant enough (from a monetary point of view), I would request the financials before committing to a lease proposal. Alternatively, I would put a clause in the lease proposal that we would need to be fully satisfied with all clauses of the lease before accepting it, including what the landlord could recharge us. Many landlords do not like to show details of recharges before a lease is signed, but if you are preparing to sign a lease that will cost thousands or even hundreds of thousands of dollars per year for a lease, does not make sense to know in details what you will be recharged for. Many people only look at the base rent and at the expected annual recharges, without trying to find out what is included in these recharges.

Moreover, as I mentioned in a previous blog, there is often room for some negotiation before you sign the lease proposal. If you think, the landlord is recharging tenants for things that are not appropriate, the best time to raise the issue is right before the lease proposal is inked. In the end, if you still decide to go ahead with the lease, at least you will know what you are committing. If there are items that you think that the landlord might take advantage at one point, you can take notes for the next time you conduct a lease audit so you do not forget to look at some specific areas in the financial statements. You might be surprised by what you find during your next lease audit.