Overcharges aren’t unusual in commercial and industrial leasing. The difficult part is finding them.
Many commercial tenants are paying more than they should because they don’t do enough to monitor their rental costs, real estate specialists warn.
For commercial tenants, rental costs include not only the pre-negotiated net rent per square foot, but also a bill for additional rental costs they have to cover, including property taxes, heat, electricity, building maintenance, cleaning and security.
Reno Tibljas, senior lease auditor at ROI Lease Management Corp., a firm specializing in commercial lease audits across Canada, estimates that up to 50 per cent of retail, commercial and industrial tenants are being overcharged often for items that are exempted in the lease but long forgotten by the tenant and by the landlord.
“Even for a small tenant it can be tough to keep track of what is and what is not a legitimate charge,” explains Tibljas. He says that hard-won lease amendments are commonly ignored or overlooked when the landlord presents monthly or annual bills for base rent and additional charges.
Tibljas says an error of just $0.20 per sq. ft. in a 15,000 sq. ft. space over a 10-year period would result in an overpayment of $30,000. In one instance, he says a national retailer occupying under 10,000 sq. ft. overpaid to the tune of $500,000 over a 25-year lease.
“Overcharges range from very small to very large, but what’s important to remember is that these are costs that are applied directly to the bottom line,” he stresses. “They can have a very big impact.”
Experts say rental cost problems range from simple errors to differing opinions about the interpretation of lease provisions.
For example, tenants can be over-billed because of mistakes in calculating the number of square feet they are occupying in a building, or because costs that should be covered by a landlord, such as capital improvements to a building, are being billed to tenants.
Rick Odegaard, associate broker at London-based Chamberlain Realty Ltd., says tenants often do not take the time to review lease costs, or lack the expertise to properly assess them. In many cases, however, there is little information to assess because the breakdown often includes details for only obvious figures such as property taxes and common area maintenance (CAM) costs. There is little detailed explanation of specific expenses, or copies of bills or other records sent along with the expense bill. ”
Tenants should make sure they’re getting what they pay for,” Odegaard says. “Sometimes the apportionment is spelled out in the lease, so you can read that. Or you can ask the landlord how he did it. There’s nothing stopping you from asking for information as to how it’s been calculated.”
In fact, more and more businesses are turning to lease audit firms that offer to examine the often complicated operating and maintenance expense records – so tenants are more likely than before to catch overcharges and fight them. Audit firms typically charge for their services by taking a percentage of the overcharges found.
The trend is hardly surprising given the amount of money involved. Odegaard says it is not unusual for additional charges to be equal to the net rental charges. In some cases, additional costs even outstrip the base rent.
“I was involved in a $2 per sq. ft. class B building in London where the additional charges totaled 500 per cent of base rent,” he recalls. “For office and retail space, it’s certainly not unusual for the additional charges to be equal to the base, and 50 to 60 per cent of base is the norm for industrial.”
In most cases, excessive billing is a result of accounting mistakes or oversights by the landlord or property management company. But at times overcharges have seemed deliberate.
ROI’s Tibljas says in one case he investigated, the landlord was charging his client for a portion of the property tax on vacant land next to the tenant building. In another, business taxes for a parking lot operated by the landlord were added to the operating costs of the building.
Other improper expenses passed on to tenants have included such things as political and charitable contributions, automobile rentals, cellular phone charges, restaurant tabs, and legal and accounting bills unrelated to the operation of the building.
“Understand too that a newer standard form of lease will also include more costs,” Tibljas says. “A set administration fee of four per cent of total rent or 15 per cent of operating costs used to cover all management costs in the early 1980s, but now the percentage fee is charged on top of the administrative costs. If you have an older lease, it’s vital that you’re being charged per that form.”
When should a lease audit be done? “It makes good sense to perform an audit after receiving the first-year statement, or after a change in the landlord or property management company,” says Tibljas. “If everything checks out okay, you can be pretty much assured that it will continue, unless charges seem to rise unexpectedly.”
Finally, if an overcharge is suspected, Tibljas cautions tenants that not all landlords are created equal. Some are willing to share detailed cost information to allow tenants to assess their bills, but many are more reluctant to open their books.
“It can be a delicate process,” he says. “Landlords don’t expect to be challenged, and most won’t do it without a fight. It takes me an average of six months before I can get a recovery, and the further back in time the errors stretch, the tougher they are to recoup.”