Getting Right – Negotiating Lease Costs vs. Reality

It’s no hidden secret that drafting a commercial lease needs efforts, time and money. The procedure is tough and laborious. Once negotiating lease costs ends, the lease is formulated and signed by landlord and tenant. The tenant takes possession of the premises. Improvements are made, and tenant opens for business.Wise outsourcing can provide a number of long-term benefits like controlling capital costs, increasing efficiency and reduced labor costs. A good outsourcing firm has the resources to start a project right away. Handling the same project in-house might involve taking weeks or months to hire the right people, train them, and provide the support they need.

The next step is tenant and landlord get the lease abstracted and enter it into their individual trackers. The landlord bills rent, and other charges and tenant pays. The landlord’s accountant reconciles CAM, property taxes, operating expenses and insurance if there is a provision for the same. Tenant shall pay the reconciliation invoices within the stipulated time frame. There may be escalation of expenses based on CPI and same shall be billed by landlord to tenant. Tenant pays the increased amount, too and it continues till the lease expires.

This happens in almost all lease transactions, along with slight variations. Too much time, effort and money is invested during lease negotiations and negligible perusal and substantiation is made after the lease commences. The important terms like improvement allowance and rent escalation is generally verified, however, the irregular terms like annual reconciliation, space measurement and measurement of utility services through separate meters are not. And if such usage is improperly billed, retrieval of over-payments can certainly affect tenant’s cash flow and decrease tenancy expenses.

Landlord and tenant usually play a nominal role in day to day administration of lease. Once the lease is signed, it is given to someone who isn’t knowledgeable enough to effectually understand the lease or is aware about the original intent of the deal. It is very important that all the information in the lease document is correctly entered into the software system used by the landlord. A commercial lease agreement comprises numbers that are well defined, however, legal terms can be confusing for a layman going through the lease document after lease commencement.

While reconciling the lease expenses like property taxes, operating expenses, insurance, the landlord’s accountant usually groups the expenses for each individual property, decides which tenants needs to be billed for each group and generates the reconciliation invoices. Considering the huge volume of leases managed by landlord, it is just not practicable for a person to calculate the pass-through expenses for each lease individually. The outcome is an annual reconciliation which is considered to be accurate thus giving rise to the possibility that a tenant who negotiated for certain inclusions and exclusions in the lease, is not paying exactly what was initially negotiated for, and can lead to huge financial discrepancies.

Often errors are made in billings, maybe due to oversight, wrong pro rata share, improper square footage, mislaid partial year allocation. Many a times, the errors can be outrageous and intentional including exempted capital expenses, apportionment of corporate expenses and much more. Landlords’ usually do not to change their methods as about 95% of leases aren’t audited. For each dollar in excluded expenses that are billed to tenants, the maximum that landlord shall need to refund is about five cents. When considered economically, landlords are profiting from such clauses, as it is not the theoretically committed clause of the billing process. Such practices helps landlord in maintaining a regular cash flow and the only way to avoid making extra paying than the amount initially agreed is to understand the billing process and conduct a lease audit. Hence, Negotiating Lease Costs is important for every lease.

It is for the tenant to verify all parts of billing process right from the base rent, utility usage, operating expenses and should be done on regular basis. This can be done by conducting a lease audit. Any discrepancy found in billing during audit should be supported by the lease document. Such audit should only be conducted by professionals having the expertise to read, interpret and understand the commercial lease and should possess adequate accounting skills to understand landlord’s accounting techniques. Lack of adequate know how in either area can result in fewer recoveries for overcharges or unsubstantiated claims that can harm the landlord tenant relationship.

The lease audit mechanism should ensure that the billing is done according to the terms and conditions agreed in the lease document. If any errors are found that favor the tenant, same should be credited back to landlord’s account by offsetting the same. The audit should not aim at squeezing the last cent from landlord, rather it should be about getting billing right and properly negotiating lease costs.