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A commercial lease in which the space leased is a portion of a larger office building, shopping center, or industrial complex will undoubtedly address the attribution of common area costs.  Those costs, generally referred as Common Area Maintenance or “CAM” costs, will most often be calculated by the landlord in gross, then allocated to each tenant based upon its pro rata share of the rentable space within the building or complex.

The calculation and allocation of CAM can be complicated by the differences which will arise in the negotiation of different tenant leases.  As an example, one tenant may successfully negotiate a more limited definition of which costs are included in the CAM calculation than another tenant.  Also, it is possible that a tenant may elect to be specially assessed certain costs which would generally be allocated throughout the building (such as having electricity metered specifically for its space).

The complications which arise from the calculation and allocation of CAM charges lead many tenants to seek a right to audit the landlord’s efforts.  The tenant’s motivation is easy to understand: if the landlord is calculating this difficult formula which determines how much money the tenant must pay the landlord, the tenant wants to be sure its payment is fair under the terms of its lease. 

Like everything else in lease negotiations, whether or not a landlord will grant an audit right is driven by the tenant’s leverage.  A large tenant paying a favorable rent rate will be much more likely to get its requested audit right than the small tenant with a bargain rent rate.  Landlords will need to consider not only the possible fallout of an audit revealing that CAM was miscalculated, but also the added effort and time needed to comply with the audit provision.

Once the landlord agrees to grant an audit right to its tenant, there are considerations within the provision which must be addressed.  Below is a list of the key items which will often prove to be negotiating points in the audit provision.

1. Timing.  Until the CAM determination has been deemed final under the terms of the lease, the landlord has a potential liability tied to that calculation.  Therefore, the landlord should limit the time period in which the tenant may object to and audit CAM.  Most landlords would be best served by requiring an objection to CAM within 6 months of its determination, so any dispute can be resolved before the next year’s determination occurs.

2. Scope. Any audit should limited to the most recent year’s determination.  While tenant may be motivated to look back several years to recapture as much overpaid CAM as possible, the effect of such an audit on the landlord’s accounting efforts would be very detrimental.  By limiting the scope of the audit, landlord can move forward from year to year without the fear of having to re-address past earnings or costs.

3. Confidentiality. Any tenant audit should be held in strict confidence, with the tenant obligated to sign a separate confidentiality agreement.  The tenant should only be concerned with the operation of its lease, and therefore has no motivation to avoid confidentiality.  The landlord could be severely damaged by news of any faulty CAM accounting, or could face the added administrative headache of multiple audits if other tenants discovered that their CAM calculations may be incorrect.

4. Dispute resolution. If tenant’s audit of landlord’s records results in a different calculation for tenant’s CAM liability, a mechanism must be in place to resolve the parties’ differences.  The most common method of resolution, if the parties cannot agree on an acceptable CAM figure, is to employ a mutually acceptable third-party accountant to determine the proper figure.  Both parties should agree in advance that any determination by the third-party accountant shall be final.

5. Costs. An audit provision should indicate which party will bear the cost of the audit.  Generally, the parties will bear the cost of their own audits.  However, it is common for the landlord to require that the tenant pay landlord’s costs if the CAM determination is not overstated by more than a certain percentage (usually between 3 and 5 percent).  This provision is useful to dissuade a tenant from “nickel and diming” the landlord on CAM annually and preserves the audit right for only those instances where landlord has materially erred.

6. Contingency contractors. A tenant may turn to an outside professional to conduct its audit.  Generally, this is not a problem, as the accounting expertise necessary to audit landlord’s CAM records would likely be outside the abilities of many tenants.  However, landlords should protect themselves against those contractors who operate on a contingency fee basis.  Many tenant auditors will seek payment as a percentage of landlord’s overstated CAM.  While attractive to tenants who wish to minimize the risk of paying an auditor with little return, these contractors can be a landlord’s worst nightmare.  Contingency auditors have been known to greatly inflate any overstatement by landlord, questioning every aspect of landlord’s operation of the building or center.  A provision which prohibits any contingency-based contractor should be employed by all landlords.

Landlords and tenants should share the goal of the most accurate CAM calculation possible.  An audit provision may provide a valued tenant the added security of knowing it may challenge landlord’s original determination of CAM.  If landlords carefully consider the numbered items above, including an audit provision in its leases need not be a feared practice.

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