Commercial leases are expensive. They contain complicated, highly negotiated provisions allocating financial responsibility for rent, operating costs, real estate taxes and other additional rent expenses between tenant and landlord.
During negotiations, both parties try to limit their exposure to certain expenses and to control cost increases that occur over the term of the lease agreement. For example, landlords want to obligate their tenants to pay for things like insurance, cleaning, management fees, repair, maintenance and payroll, while tenants want to exclude things like capital expenditures, depreciation and amortization expenses, brokerage fees and mortgage payments. Yet, no matter how many favorable provisions tenants negotiate to exclude costs or cap their increases over time, those provisions are only valuable if they are enforceable.
Most landlords have their accounting records certified by an independent CPA firm before issuing an annual reconciliation statement to tenants. "Independence" implies the CPA will take an unbiased approach, evaluating lease costs objectively before reaching conclusions. However, this process generally does not compare the landlord's accounting practices, calculations or other subjective billing decisions to each tenant's individually negotiated lease requirements.
Generally, the CPA certification references the building's "standard lease." In other words, when landlords declare that an independent CPA firm has certified their books and records, that certification may have little to do with the specific inclusions/exclusions or other provisions that each tenant negotiated. Accordingly, to check and correct the wide range of overbilling scenarios, tenants cannot rely on the landlord's "certified" books and must check the annual additional rent liabilities themselves.
Reviewing a landlord's books and records to verify expenses and resolve overcharge issues is a right implied per common law. Access to the landlord's documents pertaining to these pass-through expenses is also permitted under the covenant of good faith and fair dealing in commercial contracts, on the rationale that tenants must have the ability to verify the accuracy of any monetary obligation based upon the other party's actually-incurred expenses. So, what's the problem?
Landlords have spent the last several decades crafting lease language to contractually limit and control how a tenant checks, challenges and cures issues with these variable, annual expense pass-throughs. The upshot is an erosion of tenants' rights, the institution of a cumbersome process (some call it a "lease audit"), and a marked increase in tenants footing the bill for costly arithmetic mistakes, accounting errors, methodological issues and misinterpretations.
One such provision is particularly troublesome in that it forces tenants to retain an independent CPA firm to inspect the landlord's books and records. This requirement appears benign by design, but in practice it unnecessarily prejudices tenants by undercutting their ability to retain an advocate to help ensure they pay what was bargained for.
Here's how it works against tenants: Unlike the more reasonable, common law and contractual right to check the landlord's financial documentation, leases that require tenants to retain an independent CPA to review the landlord's books and records stack the deck in favor of the landlord. Why would one independent, objective reviewer of a landlord's books and records come up with a substantially different result than another independent, objective reviewer of the same books and records; especially if they are both playing by the same rules? Therein lies the rub — by requiring tenants to retain an independent CPA firm to perform a similar review of the same data, the landlord is all but controlling the outcome.
The independent CPA clause forces tenants to surrender their right to hire an advocate who will analyze lease costs and question expenses in their favor. Of course, this is the opposite sort of representation a tenant must seek when assessing and resolving complex financial and lease language-related issues. Since tenants rely on zealous, specialized legal and brokerage representation to help them negotiate these very provisions, they should demand the ability to retain the same level of specialist expertise and support when evaluating subjective landlord billing practices after the fact.
Even the term "independent CPA" is a red herring. "Independence" is only required for CPAs when offering an opinion on companies' overall financial statements as a whole, not analyzing and disputing commercial lease expenses. When reviewing operating costs and rent calculations tied to specific lease provisions, auditors are allowed to be client-focused, as their role is to verify charges pursuant to a contract. They are specifically not attesting to financial statements; instead, they are performing an agreed-upon service, and independence is generally not required for agreed-upon or consulting services.
So why are tenants being convinced to retain an accounting service that is limited, in many cases, to agreeing with the landlord's financial records, even when the tenant has grounds to dispute or challenge certain costs? Because tenants and their counsel fail to realize that the independence requirement allows landlords to constrict the scope of the review and all but eliminate solutions for situations where there is an incorrect application of a lease provision, but an arguably correct accounting treatment for the costs incurred. By giving up the right to a zealous advocate, tenants potentially forgo millions of dollars in charges they never expected — or needed — to pay.
All parties to a lease deserve the right to appoint representation that will interpret expenses through the lens of their best interests. As such, tenants, brokers and tenant counsel should approach lease negotiations understanding that the "lease audit rights" clause must allow the tenant to rely on experts capable of researching and disputing a variety of costly errors and complex misinterpretations.
Since the most material overcharges aren't simple miscalculations, but stem from nuanced, delicate issues that may require renegotiating parts of a lease, tenants and their advocates should push back on boilerplate independent CPA provisions and counter with language that allows for the retention of capable, seasoned lease audit professionals. More specifically, tenants should never agree to the term "independent" when it is associated with a review of the landlord's books and records, and they should leave room to hire a party more specialized than a CPA.
Tenants should secure the right to retain a partner who has the same acumen as the parties who negotiated the lease deal in the first place (e.g., a mix of commercial real estate-focused legal, brokerage, property management, building financial and accounting experts, etc.), and can represent them with the same vigor as their counsel and brokers did during negotiations.
With the right lease terms in place, tenants can engage specialists capable of identifying a broader, more material set of overpayment issues, rather than rely on a party that will largely confirm what the landlord has already submitted. What's more, tenants can avoid having their hands tied if lease disputes arise regarding ambiguous rent and expense calculations.
That freedom could equate to millions of dollars that would otherwise have gone undetected and unresolved. Though landlords may not fully concede on all elements of the "lease audit" clause, the "independent" CPA requirement exists only to limit and frustrate tenants' ability to enforce their hard-fought deals and should be eliminated at the request for proposal or letter of intent stage.
