Accepting billing practices may create a presumption that such practices are acceptable. Landlords will often argue that a tenant had an adequate chance to review their charges and object, and by deciding not to do so, accepted the underlying billing practices. To protect against this, there may be specific clauses in the lease that state that the tenant’s failure to object to a landlord breach does not constitute a waiver of its future right to do so. But in practical terms, allowing an improper practice to continue makes it much more difficult to correct in later years.

In addition, in Base Year leases, the tenant’s best opportunity to object to the structuring of the base year’s expenses is early in the term when the expenses are fresh. As with improper billing practices, if the base year is understated, it will result in overstatements of the operating expense and other escalations for the duration of the lease term. Any such understatements should be identified and discussed with your landlord immediately, before they have a chance to become embedded in the landlord’s financial plan. Landlords’ projections of future income rely on upon proper estimates of revenue from operating expense, tax and other escalations, and adjustments to base years raise significant issues as to future income projections.

Originally published as a KBA Lease Tip. For additional lease tips click here

About KBA Lease Services
KBA Lease Services, Visual Lease’s parent company, is the signature provider of commercial lease audit services throughout North America. KBA’s scope of services includes operating expense escalations, utility charges, real estate tax charges and other occupancy costs.

Formed in 1985, KBA (formerly Kislak Lease Services) pioneered the lease audit industry. KBA eliminates billing errors, recovers overpayments and ensures lease compliance. Since our inception we have reviewed over 50,000 commercial leases and recovered many millions of dollars in savings for our clients.

At the beginning of each year, landlords reconcile their buildings’ actual expenses with the amounts contributed by their tenants during the prior year. They then issue adjusting statements that settle each tenant’s liability and establish the new estimates for the current year.

Although landlords are obligated to follow the leases when issuing these statements, tenants have the burden of identifying errors and bringing them to their landlords’ attention. If there is anything wrong with these end-of-year statements, and no objection is raised, the statements are deemed correct and errors can become embedded in the leases’ financial structure for the balance of the term. This difficulty is exacerbated by three additional factors:

Tenants must be careful when dealing with end-of-year statements. If no objection is raised, errors can become embedded for the entire lease term.

1. Catching errors takes time, and most leases give the tenant only a short window (usually 30-120 days) within which to object to any errors the statements may contain. If they do not object on time or in the correct form, the statements are deemed correct and the errors are no longer fixable. (For a more detailed discussion of lease audit deadlines, see our Article, “Negotiating Audit Rights in Leases.”) 2. Finding the more subtle errors takes a high level of expertise. Most tenants and their lease administrators are able to identify deviations from the stated lease terms (such as wrong base year, wrong share or incorrect math), but the more significant errors are caused by ambiguity and incompleteness of lease language. These errors are subtle and require a fairly high level of expertise to detect. 3. Tenants are often deceived by the amounts due pursuant to these statements and are often of the view that if they don’t owe anything at the end of the year, they have nothing to worry about. However, the amount due at the end of the year is only a reflection of how close the estimates were to the actual expenses and do not reflect the tenant’s underlying liability. In order to help limit exposure in this area, tenants are cautioned to review each lease carefully and identify the types of pass-through charges that are called for. They should identify the time periods that apply to the tenant’s right to object and identify the nature of the action that must be taken within the time period. Finally, they should develop a protocol for issuing blanket objections to preserve rights to reclaim overcharges, and develop a plan to apply the appropriate level of review for each bill within the time periods set forth in each lease. This article was originally published as a KBA Lease Tip. To view the article please click here. About KBA Lease Services KBA Lease Services specializes in controlling corporate real estate lease costs through lease auditing. Formed in 1985, KBA (formerly Kislak Lease Services) pioneered the lease audit industry. KBA has reviewed tens of thousands of leases and saved many millions of dollars for its clients. Visual Lease® is KBA’s powerful, easy-to-use lease management software system. Visual Lease has proven to be the best designed system on the market. It is powerful enough to manage the most complex lease administration tasks, yet easy enough for novices to use. ©2009 KBA Lease Services, LLC. All rights reserved. No reprints of this article may be made without the written permission of KBA Lease Services, LLC.

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