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Lease Strategies

Product Overview

This LARG contains the following reference materials: The Results of Tenant Lease Audits Stay Mainly Off the Record, and the Lease Clause Critique: Selected Clauses from the Post Audit Settlement Agreement.

Number of Single Spaced Pages: 12




This LARG looks at several aspects of settling post audit controversies between landlords and tenants concerning the collection of excess amounts of operating costs and utilities during the term of the lease. The first section focuses upon the anatomy of such disputes, and at how important the element of confidentiality is to the landlord in their resolution. The Lease Clause Critique features extended excerpts from a settlement agreement for a tenant initiated lawsuit. That suit pertained to several issues uncovered during a tenant audit of its lease.

The Results of Tenant Lease Audits Stay Mainly Off the Record

There's little doubt that tenants are auditing their leases more these days to double check the amounts collected by the landlord for operating costs and the like, but it's hard to get them to talk about the audit results. There are several good reasons for circumspection concerning audit results.

The first one is that the tenant knows that if it goes public with audit results unfavorable to the landlord, its relationship with the landlord may be damaged beyond repair. Tenants happy with their current premises want continued good relations with their landlord--it's good business.

Second, if the tenant spills its guts publicly, the landlord will likely harden its negotiating position, because it will have to face similar claims from other tenants who get wind of the audit results.

Finally, if the tenant discovers something significant in the audit indicating that the landlord has been overcollecting for the past several years, the tenant often uses such information to come to a private settlement with the landlord. That's the discreet way for the tenant to capitalize on the leverage it gets from the audit results unfavorable to the landlord. The tenant can negotiate new lease concessions, and stay in its present space for the long term.

What if the tenant conducting the audit discovers that the landlord has been undercharging for certain services under the lease? In such cases, the tenant often says nothing, and has the best of both worlds. It has just conducted a lease audit, which puts the landlord on notice that the tenant is paying attention to pass throughs under the lease. Plus, the tenant gets the benefit of actual underpayment for a portion of its occupancy costs.

Common Ingredients of Audit Settlements

When the tenant discovers that it has been overpaying for certain services under the lease, what shape do the final settlements between the landlord and the tenant take? It's not rocket science. The tenant negotiates for the following sort of economic ingredients in the settlement:

  • crediting the amount of tenant overpayment to future operating or utility costs;
  • reimbursement from the landlord to the tenant of the excess amounts collected;
  • interest on excess amounts collected;
  • lease extensions at favorable rates;
  • renegotiation of the rental rates for the term in progress;
  • rights to expansion space for the tenant on favorable terms; and
  • restrictions on the landlord's future collection of operating and CAM costs.


End of Excerpt