This document discusses tenants' rights to audit landlords' records of common area expenses. It explains that if a lease contains an audit right, then the tenant can audit expenses according to the lease terms, which may involve an accountant examining records for accuracy. Without an audit right, tenants can only verify that expenses were incurred but cannot question why. The document provides tips for landlords, noting that audits usually don't burden them and often conclude with both parties agreeing on findings after mistakes are corrected. It aims to dispel misconceptions about audits being adversarial and suggests landlords can avoid triggers for audits by controlling expense increases and changes in accounting practices.

1. Audit Right v. No Audit Right:
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Common Area Expenses
Mike Holmes
June 11, 2014
SAN FRANCISCO | CENTURY CITY | LOS ANGELES | ORANGE COUNTY | SAN DIEGO

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Audit Right
• If a lease contains an audit right
in connection with common area
expenses, then tenant may audit
those expenses in accordance
with the express lease terms.
• An audit sometimes permits a
CPA or other professional
selected by tenant to examine
landlord’s records relating to a
particular issue for accuracy and
compliance.
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“Hello, Mr. Jamison? The tenant’s auditor
is here to review the landlord’s records.”

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Audit Right (Continued)
• The terms of the lease may limit the audit right.
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• For example, the lease may:
 Require certain notice
prior to an audit;
 Determine how the
auditor is selected;
 Limit the time within which to perform an audit; and
 Limit the items that an auditor may investigate and
address.

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No Audit Right
• If a lease does not contain an audit right in connection with
common area expenses, then tenant is not entitled to an audit.
• Without an audit right provided in the lease, tenant may not:
 Examine all of landlord’s records;
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 Demand explanations
regarding landlord’s decision to
incur particular common area
expenses; or
 Challenge landlord’s
decision to incur particular
expenses or otherwise dispute
the need for those expenses.

5. • What is tenant entitled to without an audit right?
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5 No Audit Right (Continued)
 Disclosure of documents that
support landlord’s statement of
tenant’s share of common area
expenses . . .
 For the limited purpose of
verifying that the listed expenses in
landlord’s statement were incurred,
and that the amounts are accurate.

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No Audit Right (Continued) 6
 Landlord may disclose
such relevant documents
(e.g., invoices, receipts or
canceled checks) in any
reasonable manner that
landlord elects, by
providing copies or
permitting tenant to
examine the originals.

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In a Nutshell…
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Without an audit right expressly provided in the lease,
tenant is permitted to verify that an expense was actually
incurred by landlord, but tenant is not permitted to
question why the expense was incurred.

8. Tips from the Tenant Side
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Ed Muna
Senior Vice President, Lease Audit Services
Hughes Marino
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9. Why You Shouldn’t Fear the Audit/Review
•Operating expense statements are prepared by teams of
well intentioned individuals, but the fact is mistakes can
be made.
• It’s not always realistic for the entire team, from the
management team, to the accountants, to the engineering
staff to know what was negotiated in the many leases of
their tenants.
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Audit Misconceptions
•An audit will require a significant demand on the
management team.
Reality: Most operating expense audits don’t involve
going through the landlord’s books and records.
•The lease audit is a win/lose proposition.
Reality: 99% of reviews/audits conclude with both
parties mutually agreeing with the findings.
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Audit Misconceptions
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•An auditor will stretch to find mistakes and negatively
impact a landlord’s relationship with its tenant.
Reality: Most audits conclude without any conflicting
findings and give tenants the peace of mind that charges
are fair. When inconsistencies are found, they are
typically black and white and the landlord will improve
its relationship with a tenant by correcting. All parties
realize that mistakes are made, so the question is how
are they handled when identified.

12. Audit Triggers and How to Avoid Them
•Increase in annual pass-through versus expectations
•Change in ownership and accounting/spending
philosophies
•Capital expenses
•Tax expenses
•Other newly introduced expenses
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