When negotiating the terms of a new lease, it is important for tenants to include language specifying their rights regarding lease expense audits. Leases that are silent on this subject are generally preferable to those that include limitations and do not preclude a tenant and/or their representative from conducting lease audits. However, if the subject of expense review is broached, then the inclusion of an audit clause in the lease avoids a potential misunderstanding of the tenant's rights to receive and review detailed information on the landlord's building operating and common area costs.

The following is suggested audit clause language and possible negotiation points.

Recommended Audit Clause Lease Language

Section ___, Verification of Operating Statement. Landlord shall furnish Tenant such information as Tenant shall reasonably request to verify Operating Expense and shall cooperate with Tenant in verifying the Operating Statement. The Operating Statement shall be rendered by Landlord to Tenant within one (1) month after calculation of such Operating Expense by Landlord. The payment of any Additional Rental by Tenant shall not preclude it from questioning the truth, correctness, or completeness of any Operating Statement. Tenant and its authorized representatives shall have the right to audit Landlord's records with respect to Operating Expense. In the event Tenant's audit discloses discrepancies, the appropriate adjustment shall be made, and if such discrepancies result in an overcharge to Tenant that is in excess of 2% of the annual billing to Tenant for such item(s), Landlord shall also reimburse Tenant its actual out-of-pocket costs of such audit. In the event Tenant shall dispute any Operating Statement and the parties cannot resolve their differences within two (2) months thereafter, then the matter shall be referred to arbitration as provided in Section ____.

The above lease language is tenant friendly and some negotiation may be required if the landlord objects to the one-sidedness of this audit clause. Negotiation points would include:

• Limit the amount of time that tenant has from the receipt of the Statement to do the audit. We recommend not less than one year but obviously prefer to keep it open. Anthony F. Collura Vice President, Lease Services CRS Lease Specialists
  
  

• Increase the percentage of error required before landlord has to reimburse for the cost of the audit.
  
  

• Limit the cost of the audit, i.e., "not to exceed $5,000".
  
  

• Take out the reimbursement of audit cost entirely (last resort if the two above compromises are not acceptable).
  
  

• Limit the number of years available for audit, i.e., the previous three years' statements.

We also recommend some type of dispute resolution provision, such as arbitration. While it rarely comes to that, it does act as a preventative measure against stalling and is usually less costly and time consuming than litigation.

The prudent tenant will protect himself by ensuring his right to audit expenses, as well as arbitration or some well-defined mechanism to resolve disputes arising from that audit.