THINK ABOUT how many lease amendments and modifications have been negotiated over the past two years. From layoffs to retirements, COVID has overwhelmingly affected the workforce. Due to limited bandwidth, we are confronted with prioritizing tasks which, prior to COVID, were ‘normal’ day-to-day operating procedures easily performed. These factors have challenged the world of Lease Administration. Employees are faced with doing more with less, resulting in a greater probability of errors in landlord billed occupancy expenses.
Tenants need to scrutinize occupancy expense billings
As tenants, now more than ever, it is important to scrutinize your occupancy expense billings. The question is, when is the best time to review the expenses—prior to paying the reconciliations, or by performing full audits after the invoices have been paid?
The financial impact of COVID has made auditing expenses after they are paid extremely challenging. Audit rights in leases are heavily negotiated and more restrictive than they were in the past. Many landlords do not have resources readily available to assist with providing the audit information. Even after the audit is performed and the report is submitted, competing priorities, among other things, continue to challenge the timeliness of the landlord’s response and the ability to negotiate a settlement. Another age-old hurdle is the significance of the overcharges identified. In many cases, landlords are reluctant to agree to smaller dollar claims knowing that the claim value will not lead to tenants engaging legal assistance to pursue the overcharge. Unfortunately, this results in many audits never being settled and the identified overcharges not recovered.
The benefits of a desktop review are valuable,
and more important than ever.
The benefits of integrating a desktop review process into your invoice payment procedures are more valuable than ever before. In today’s environment, landlord’s want their bills paid as soon as possible and are more apt to cooperate with tenant’s information requests in order to expedite the tenant’s payment. This leverage is not available to a tenant once the invoice is paid. Overcharges identified and agreed to during the desktop review process can be offset against the amount due, resulting in a timely reduction in occupancy expenses hitting the bottom line and tenant’s reserving their cash flow.
Many leases require tenants to remit payments within a certain number of days from receipt of an invoice. A landlord may decide to enforce this provision as a way to avoid cooperating with a tenant’s billing questions, or just refuse to cooperate in general. Responses of this nature should serve as a red flag for the tenant to pay as billed to avoid a potential default and identify the lease for a full leasehold audit in the future.
Overall, the savings from an efficient desktop review process should outweigh the costs involved in developing and implementing the program. Of course, the results will vary based on the language in each lease. It may be worthwhile to select a small population of your leases on a trial basis to prove the results will be beneficial to the bottom line. Another option is to engage outside consultants on a contingency fee basis to perform this work. In the end, your legal and real estate teams work hard to negotiate the language in each and every one of your leases; implementing a “right fit” lease compliance process is essential to maximizing the benefits of your lease provisions.
—Article contributed by Debbie Ravel
ABOUT THE AUTHOR: Debbie Ravel is a Certified Public Accountant with over 30 years of real estate accounting, auditing, and lease administration experience. Debbie has managed, negotiated, and settled lease audits in North America and abroad for over 3,500 leases, recovering overcharges in excess of $260M. She has served on NRTA’s Curriculum Committee and currently serves on the Board of Governors as the Association’s President.