Lease Auditing: The Balance Between Art and Skill

Published on Friday, 13 September 2013 08:58:40    Written by Marc
Most of us in the field of real estate and lease management know that lease auditing is both a technical skill and an art. First, there is the technical aspect where you get to dig into level upon level of detailed information to see if the landlord is charging what was agreed to in the contract. All too often we see re-charges to tenants that are not completely in line with some of the clauses in the lease. Whether these re-charges are honest mistakes or done intentionally can be the subject of another discussion, but for the sake of this article, we will call these differences ‘errors’!

Lease management 3DTherefore, there is the technical skill of finding errors as we just pointed out and then there is the art. While the technical skill can come from simply analyzing line by line every re-charge to the tenant and comparing it with the lease, the art comes from a feeling or intuition that something is not exactly right. At times it might trigger the need to request more information and at other moments it’s the intuition that pushes someone to physically go on the roof to see if it was recently replaced or not (not that we would ever doubt a landlord, but after seeing these things with our own eyes it tends to improve relations).

That intuitive artist in you triggers your internal alarm when you see some amounts that do not seem quite right (700,000 dollars for some parking repair? That may or may not make sense). Above all, when in doubt, question. Most times your doubts will be put to rest. However, either sometimes you will discover an error that can be corrected rapidly by the landlord or one that may set off a series of intensive debates about what is a re-chargeable expense and what is not. For example, does the building in which you lease space have a parking area that the landlord uses to generate revenue? I am referring to daily paying parking open to the public, not parking spaces leased to tenants on a monthly basis. If so, does the landlord make you pay for the expenses, such as repairs and maintenance of the parking? If you lease provides a clause that lets the landlord do this then there is not much to debate. But in many leases, if the tenant did his homework prior to signing the lease, the landlord should not be re-charging to the tenants the maintenance cost of the parking for which the landlord gets to keep all revenues from the general public.

A few years ago, we decided to do a lease audit on a site that we had been leasing for about six years. The site came with an acquisition we had made a few back and for some reason, we never took the time to do a complete lease audit (Maybe because we never had any serious problems with the landlord). After all, the landlord was very well respected in the industry and we never gave much thought about the chances of getting back some money from that lease. However, at one point we did manage to get to it and made this audit. What started as a few minor findings quickly escalated into a large number of items for which we had overpaid for, and for a number of years. We then realized that we could go back a few years on the lease and claim for these over payments. Obviously, there was a push-back from the landlord and we were not able to go back the full six years, but we did manage to go back a few. Then, just as we were ready to close the file, we found a few more. This time it was in relation to the size of the space. Since we were leasing a number of floors in this office building, some of the space was subleased and we were paying a sub-landlord not the owner. Of course, this was known by our team but since we had never done a lease audit on that site, we had to start from the beginning. We discovered some leases were actually subleased and that we were paying rent on a larger footprint than what our sub-landlord was being charged, and they were pocketing the difference. This made way for more claims and in the end, the lease audits enabled us to recuperate a few hundred thousand dollars. The funniest thing was to receive one check, then another, then another and then trying explaining this to our accounting department. About two years later, we decided to do another lease audit of the leases we had at this same site only to find a few more discrepancies, which we had not found during first audit. After that event, any site we were leasing for a few years or more was systematically audited, we found that it was time and money well spent.