Lease audit: what it is and how a landlord prepares for one

A lease audit is a review of the rent, service charges and other amounts billed under a lease against the terms of the lease itself, to confirm that every amount was calculated and charged as agreed. Most lease audits are started by tenants, who want to check the operating costs they share, but a landlord or property manager can run the same review on its own leases, and the one who is well prepared answers an audit in days rather than months.

What a lease audit looks at

The lease is the reference. The audit compares three things with it:

• The rent. Was the base rent billed as set in the lease, with the rent steps and indexation applied on the right dates and at the right rate? Was a rent-free period or a reduced rent honoured for the agreed months?
• The service charges. Which costs were passed on, were they recoverable under the lease, how was each tenant's share calculated, and were caps, exclusions or fixed fees applied? This is where most audit findings come from.
• The dates and the area. Was the lease billed from the right start date to the right end date, on the right area, and was a change of unit or area reflected in the invoices from the right day?

In a shopping centre the audit also covers turnover rent: the reported sales, the breakpoint and the rate. Those mechanics are in our guide to turnover rent.

Why tenants ask for one

Many commercial leases give the tenant the right to inspect the landlord's records for the service charges, usually within a set time after the year-end statement. Tenants use it when the statement is much higher than the estimate they paid during the year, when a share looks out of line with their area, or simply because a new finance team wants to know what it is paying for. The most common question is not about a single invoice but about the calculation: how was my share worked out, and against which total?

A typical example is the denominator. One cost may be split over the leased area of the building, another over the occupied area, and in a building with vacant floors the two give different shares. Explaining which rule was applied and why, with the lease clause that supports it, settles most of these questions. What a lease may or must say about audit rights, time limits and who pays for an audit is for your legal adviser.

How a landlord prepares

An audit is easy to answer when the data behind the invoices is already in order. The preparation is the same work that makes the year-end statement right in the first place.

• Every lease on the register, with its clauses. The rent, the steps, the indexation rule, the recoverable costs, the caps and exclusions, the dates and the area, recorded on the lease when it is signed or amended, not in a side file.
• One allocation key per cost line. For each cost of the building, the rule that splits it between the units: a coefficient per unit or a direct charge to one tenant. Defined once, applied every year, visible on the statement.
• Supplier invoices against the budget. The costs that were passed on have a supplier invoice behind them, recorded through the year and compared with the budget, so the actual cost of every line is there when someone asks for it.
• A settlement that follows from the year. At year end the budget is settled against the actual costs and each tenant's share is compared with what was billed. The amount due or the credit is the result of that settlement, not a figure worked out afterwards.
• History that stays. When a unit was split, merged or re-measured, the old unit and its invoices remain readable, so a charge from two years ago can still be traced to the area it was billed on.

Auditing your own leases

The same review is worth running from the landlord's side, on a schedule rather than on request. Three checks catch most of what goes wrong:

• Rent steps and indexation. For every lease, compare the rent billed this year with the rent the lease says should apply this year. A step that was never applied, or an index applied a year late, is money that is quietly lost every month.
• Critical dates. Leases that have passed an expiry or an option date without a decision recorded, and leases whose billed area or unit no longer matches the floor plan.
• Charges without a clause. Any cost passed on to a tenant that the lease does not name as recoverable, or that exceeds a cap in the lease.

An audit of this kind is also the first step when a building changes hands or changes manager, because that is when loose interpretations of the leases come to light. How the fixed rent is set and changes over the term is in our guide to base rent.

How VemLease supports a lease audit

In VemLease the lease is the record the audit is checked against. Rent steps, indexation and turnover rent are set on the lease in one flow, so the rent billed in any year can be read from the lease that was signed. Critical dates, options and renewals are tracked on the lease with alerts before they fall due.

For the service charges, the budget of the building is split into quotas by allocation keys defined on the building, the quotas are invoiced monthly or quarterly, supplier invoices are recorded through the year and compared with the budget, and at year end the budget is settled against the actual costs. Units are kept with their areas and dates; when a unit is split or merged, the old unit is ended, never deleted, so contracts, invoices and occupancy history stay readable. The rent roll, invoice management and revenue tracking sit in one system across assets and entities, with customisable reports and a data cube for your BI tool.

Read more about CAM and service charge reconciliation and lease tracking and critical dates, or see how the service charge year runs in an office building.

Questions about lease audits

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