Are You Paying Your Landlord Too Much?

Historically, once a lease has been signed, many tenants paid little attention to their total occupancy costs until faced with a renewal or relocation decision.

Generally, the total occupancy cost is comprised of the base rent and an allocation of the common operating expenses incurred by the landlord. The operating costs are typically comprised of a building’s property taxes, maintenance and security costs, building renovations, insurance premiums and utilities. These landlord expenses are passed onto the buildings tenants on a pro-rated basis. The landlord will estimate the year’s expenses and invoice the tenants according to the estimate during the year and then complete a reconciliation early in the new year accompanied by either an invoice or refund cheque. For many tenants, it was believed that they had no clout to influence, dispute, question or even properly monitor these operating costs.

In the past, operating costs use to be a relatively small portion of the total lease cost, however, in recent years they can easily comprise 50% or more of a firms costs. Even with this increase, operating costs remain an area that is poorly understood by tenants and mismanaged and incorrectly expensed by some landlords.

A lease audit provides a detailed critical analysis of all of the financial terms of a tenants lease documentation in relation to the landlord’s billings to ensure that the tenant pays what they are contractually bound to pay and nothing more.

Occupancy costs are often the highest operating cost for most commercial tenants after their salaries and benefits, yet they often receive very little attention by companies as they focus on their core business. A lease audit is an important tool for businesses to reduce costs and improve their bottom line. The audit can recover past overpayments, ensure lease compliance going forward and identify unfavourable lease clauses for remedial action or future lease renewal negotiations.

Here are some of the typical billing errors that are found during lease audits:

Charging for more space than being occupied
Incorrect mathematical calculations and accounting errors
Incorrect adjustment of grossing up expenses
Incorrect application of caps, CPI or other capping mechanisms
Incorrect allocation of utility costs
Inclusion of expense items where no such expense provision is listed in the lease, i.e management fees, capital improvements, administrative fees on top of management fees
Depreciation of buildings and equipment charged to tenants
Incorrect amortization of capital maintenance costs

Informed tenants need to be proactive in managing their occupancy costs. Landlords can have many different lease contracts in place in a single building and it can be very easy to inadvertently overlook a particular clause or misapply the terms of the lease. Since lease audits normally are offered on a contingency basis, if there is no refund obtained there is no fee payable, therefore there is no risk to the tenant. Our most recent lease audit success resulted in a client receiving a reimbursement from their landlord of close to $250,000, which would be a boost to any bottom line.