LEASE AGREEMENT REFERENCE GUIDE 760: AUDITING OPERATING COSTS $24.95
THE TENANT'S AUDIT OF OFFICE LEASE OPERATING COSTS
During the Seventies and early Eighties, the vast majority of office landlords adopted the use of a comprehensive operating costs or direct expense clause for their office leases. Such clauses contain broad definitions of "operating costs," and obligate the office tenant to pay its proportionate share of such costs as additional rent based upon the amount of square footage leased by the tenant. The wording in many such clauses is broad enough to permit the landlord to include virtually any expense associated with the office building in the pool of costs to be reimbursed by the tenants on a pro-rata basis.
Office building operating costs have increased mightily over the last twenty years or so. And they will no doubt continue to increase, since most pro-landlord office lease forms obligate the tenant to pay its pro-rata share of operating costs, no matter how much such costs turn out to be.
THE TENANT COUNTER PUNCHES
As office tenants (particularly national tenants who leased office space across the country) gained experience with comprehensive operating costs clauses, they began to seek ways to contain their operating costs contributions. In addition to negotiating changes in the actual business deal concerning operating costs (e.g., higher expense stops, or caps or other limitations on operating costs for particular years), they started to employ at least two drafting devices intended to contain the amount of operating costs that can be passed through to the tenant by the landlord:
The exclusion of certain costs from those which can be passed through to the tenant for reimbursement. Examples of such exclusions include:
Cost conscious office tenants have also traditionally used representations by the landlord concerning operating costs as a drafting device to contain such costs. Examples of such representations include:
A SAMPLER OF OPERATING COSTS AUDIT CLAUSES
Three clauses drafted for office leases which give the tenant the express right to audit the landlord's records pertaining to operating costs passed through to the tenant for payment are presented below. In some respects, the content of these clauses is reminiscent of pro-landlord audit clauses drafted for retail leases which give the landlord the right to audit the tenant's sales to verify percentage rent reports and payments. For example, in one or more of the clauses that follow: