Lease Audit Procedures: A Step-by-Step Process

A lease audit is a methodical review of the charges a landlord bills to a tenant in a commercial real estate context. Its purpose is to ensure all financial obligations align with the lease agreement, confirming that expenses are both mathematically correct and permissible under its specific clauses. The audit verifies costs passed to the tenant, such as for common area maintenance, property taxes, and insurance. This targeted review ensures tenants are not overpaying due to billing errors, misinterpretations of lease language, or the inclusion of unallowable costs, which helps maintain financial transparency.

Required Documentation for a Lease Audit

A successful lease audit begins with gathering comprehensive information. The foundational document is the fully executed lease agreement, along with any subsequent amendments or addendums, as this outlines all negotiated terms. To validate the landlord’s annual operating expense reconciliation statements, an auditor also requires access to the landlord’s general ledger for the property, which provides a line-item detail of all expenditures.

To substantiate the figures in the general ledger, copies of invoices for significant expenses are required, including bills for services like landscaping, security, and janitorial work. Property tax statements and the landlord’s insurance policies are also needed to verify two of the largest pass-through costs. Finally, the building’s rent roll for the audit period is used to verify the total occupied area and recalculate the tenant’s pro-rata share of expenses.

Conducting the Lease Examination

The analytical work begins by recalculating the tenant’s pro-rata share of property expenses using the rent roll and lease figures, then comparing it to the percentage the landlord used. The examination then moves to a detailed analysis of the operating expense statements. For leases with a base year or expense stop, the auditor verifies that the figure is calculated correctly and that only expenses exceeding this threshold are passed through.

Each expense category is scrutinized to identify costs prohibited by the lease. This involves vouching, or tracing, significant expense amounts from the reconciliation statement back to the landlord’s general ledger and then to third-party invoices to confirm their validity. A primary focus is identifying non-allowable costs that landlords may have incorrectly included.

Commonly excluded costs that auditors search for include:

• Capital improvements miscategorized as repairs, such as replacing an entire HVAC system versus repairing a single unit.
• Marketing expenses and brokerage commissions.
• Executive salaries not directly related to property management.
• Administrative fees that exceed a contractually agreed-upon cap.
• Management fees that are not calculated according to the method specified in the lease.

Every finding is meticulously documented, referencing the specific lease clause that disallows the charge.

Developing the Audit Findings Report

After the examination, all identified discrepancies are consolidated into a formal audit findings report. This is not merely a list of complaints but a structured, evidence-based document that methodically details each issue and its financial consequence. It serves as the official communication to the landlord, presenting the results of the review in an organized manner.

The report begins with an executive summary that provides a high-level overview of the conclusions, stating the total potential overcharge discovered. A following section outlines the audit’s scope, specifying the property address and the exact time period reviewed.

The core of the report is the detailed findings section, where each discrepancy is presented individually. For every finding, the report includes a direct reference to the specific clause in the lease agreement that governs the expense. It then explains the error and quantifies its financial impact, referencing supporting evidence like an invoice number.

A summary schedule is usually attached, listing all findings in a table format. This schedule quantifies the financial impact of each issue and totals them to present a single, aggregate claim amount for the landlord to review.

The Lease Audit Resolution Process

Presenting the audit findings report to the landlord initiates the resolution phase. The delivery is often accompanied by a formal letter that summarizes the findings and proposes a path toward settlement. The landlord is given a reasonable period, often 30 to 60 days, to review the report and its supporting documentation.

Following the review, a period of discussion and negotiation begins. The landlord may agree with some findings while disputing others that involve interpretations of lease clauses. Maintaining a professional and objective tone is important, focusing on the facts presented in the report and the specific language of the lease.

If disagreements persist, the lease agreement may specify a dispute resolution mechanism, such as mediation or arbitration. The most common resolutions are a direct refund to the tenant for the overbilled amount or a credit applied against future rent payments. In some cases, the resolution may involve non-monetary adjustments, such as correcting the base year expense figure for future years.