Commercial Leasing Series - Review of Operating Expenses/Audit Rights

By: Laila Parvez

The Lease should obligate the landlord to provide an annual statement of all actual expenses incurred by the landlord in operating the Complex/Building in which the leased premises are located, the tenant’s proportionate share of such expenses and the method of calculation thereof.   The statement should be provided within a reasonable period of time – no later than 9 months - after the end of each Lease year.  Clear language should be included in the lease detailing how any additional payments required by the tenant, or a credit by the landlord to the tenant, after the actual operating expenses are calculated, are to be paid and when.  The tenant should negotiate a reasonable period of time to review the statement and to dispute any items contained therein.  The tenant should try and negotiate a right to review the books and records of the landlord in connection with the operating expenses, and if possible, to have the right to audit such books and records.  Depending on the negotiating strength of the tenant, it may be able to include a clause which requires the landlord to pay its audit costs if the audit reveals an overcharge of greater than a certain percentage, for example 3%.  While an audit can represent a significant cost to the tenant, having the right to conduct one, at least grants the tenant some oversight over the way the landlord charges operating expenses. The Tenant should try and include language prohibiting the landlord from charging the tenant for expenses incurred more than a year prior to being billed.  This will ensure that the tenant does not receive a large unexpected bill from the landlord for expenses incurred in the distant past and will also force the landlord to keep accurate accounts.

In my experience, a majority of landlord-tenant disputes arise in connection with the calculation of operating expenses and the tenant’s proportionate share of such expenses.  A clear and concise way to resolve such disputes should be included in the lease.  Many leases require disputes to be settled by arbitration. However it may be more cost effective and faster for the lease to require the parties to first submit the dispute to mediation, and only failing successful resolution of the dispute after mediation, should arbitration be required.  

For a discussion of additional items relating to commercial leasing from the tenant’s perspective, please see click here.


For more information on commercial leasing matters, please contact Laila Parvez at (416) 368-0491 or by email at lparvez@businesslawyers.com.

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