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Limiting Audit Rights

As tenants become more savvy in analyzing the cost of leasing retail space, they are more and more frequently requesting the ability to audit the landlord's expenses for common area maintenance.

In the event landlords feel they are in a position where they cannot avoid granting this tenant right, there are a number of methods to limit this right, while simultaneously allowing tenants to review the landlord's expense records.

Defining the audit A tenant's right to audit the landlord's records may give the tenant access to far more information than just CAM expense records, such as minimum rent charges, construction allowances, another tenant's obligations in terms of center expenses, and incentives given to other tenants at the center.

Therefore, the landlord's first and most important objective is to clearly define (i.e., limit) the records that may be reviewed. By doing so, the landlord can limit the scope of the audit to information that affects only the auditing tenant.

Practicalities of the audit In order to further protect itself, the landlord must limit the number of times during the lease term that the tenant can perform the audit. In addition, the landlord should dictate the audit location, as the audit right is a concession to the tenant.

Requiring the tenant's auditor to review the records at the landlord's office will allow the landlord to avoid excessive shipping and copying charges. The landlord should also limit the duration of the audit to a specified number of days during the landlord's usual business hours to further limit the "fishing expedition" nature of the audit.

Another necessary precaution is limiting the tenant's opportunity to perform the audit. All audit clauses should provide that the tenant must notify the landlord, and thereafter perform the audit, within a specified number of days following landlord's submission of year-end CAM reconciliation statements.

The audit provision should also state that the tenant can examine any particular year's records only once. In addition, the landlord should include a statement that obligates it only to retain its records for a limited period of time. This further limits the tenant's opportunity to look back at these records. A commonly used time period is two years.

Landlords are also well within their rights to require reimbursement for copying of their records. In many instances, landlords have even been successful in also charging the tenant fees for time spent by the landlord's employees in handling the audit.

Identity of the auditor A well-drafted audit provision will also specify which party pays the audit fee. Generally, the expense should be paid by the party performing the audit. However, most tenants will request that the landlord foot the bill of the auditor if the results reveal a CAM overbilling that exceeds a specified amount. The figure is usually expressed as a percentage in excess of the CAM charge actually billed to the tenant for the lease year in question.

In light of the fact that the landlord may be responsible for the auditor's fee, landlords must protect their exposure. The newest wrinkle in the audit arena is the contingency-fee auditor. These auditors are hired to represent tenants, and their fees are determined by the dollar amount they obtain for the tenant as a refund from the landlord.

The careful landlord will exclude the use of a contingency auditor from the audit clause in the lease. A better description of the auditor's fees should be stated in terms of a commonly reasonable fee for such services.

Final pointers Wise landlords will further protect themselves by preserving the right to contest the results of the tenant's audit. This part of the provision should provide for reimbursement of the landlord's fees in contesting the audit results, similar to the process discussed above.

One easy solution to the puzzle of an acceptable audit provision is to place an annual cap on increases in CAM charges and to delete the audit right altogether. However, in the event that an audit provision is unavoidable, the landlord can protect itself with a specific description of the parameters of the audit itself, responsibility for fees and a concise description of the records that can be reviewed during the audit process.

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