As tenants look for ways to control costs (or to find new sources of savings), commercial landlords are seeing an uptick in CAM audits. In these audits, tenants or independent businesses acting on their behalf seek to review the common area maintenance (CAM) costs commonly passed along to commercial tenants. CAM audits present numerous issues and opportunities for both landlords and tenants, each of which should be carefully considered when contemplating or confronted with an audit.
For the tenants, these audits provide an opportunity to potentially lower their costs going forward and possibly even recover costs for which the tenant has already reimbursed the landlord. Depending on the language of the lease, a tenant requesting an audit can seek to review not only the current costs that the landlord is seeking to recover from the tenant, but also costs from prior periods. This means that tenants can use an audit request as a way to recover funds previously paid to the landlord. In some instances, an audit may not result in recovery of funds but instead provide the tenant with leverage to renegotiate other aspects of the lease. An audit request may also provide tenants with these benefits at a relatively low opportunity cost: the amounts at issue may fall into a gray area where they provide a worthwhile return to the tenant but are not large enough for the landlord to justify the expense of a careful accounting of the costs.
Audits are not, however, without risk to a tenant. First, the right to an audit in the first place may be barred or limited by the terms of the tenant’s lease. If so, then the request itself is unlikely to do much for the tenant and risks alienating the landlord. Second, if the lease allows the tenant to recover for any overpayments, the same provisions would also likely allow a landlord to recover for any underpayment. Consequently, a tenant may want to carefully consider whether to request an audit, as waking the proverbial sleeping dog could result in higher CAM costs, both for the current period and for prior periods.
For the landlords, on the other hand, these audits are most likely to be, at best, an annoyance and, at worst, a serious problem requiring significant repayment to the tenant. Accordingly, should a tenant request an audit, the landlord would be well served to carefully review the tenant’s lease to see if it includes any prohibitions or limits on CAM audits. Indeed, even if the lease allows for an audit, there may not be specific requirements for the audit itself, in which case exactly what an audit would involve or look like may be left to the landlord’s discretion.
If a lease allows for a CAM audit, then a landlord should provide information regarding the CAM charges for which the tenant has been billed. If the landlord has good records, this may be a fairly straightforward, if tedious, process of gathering the underlying bills and providing them to the tenant, along with a calculation of the tenant’s share of those bills, to show the tenant that the charges were proper. If, though, the landlord’s records are less than ideal, then the landlord may need to try to obtain the underlying bills from its service providers or figure out other ways to demonstrate the correctness of the CAM costs (e.g., general ledgers, cancelled checks, etc.). Should a review of the CAM costs reveal that the tenant has been charged incorrect amounts, then the landlord should be prepared to address the overpayment with the tenant, realizing that the overpayment may provide the tenant with an opportunity to seek concessions from the landlord. On the other hand, if the audit reveals that the CAM charges have been too low, then the landlord may have the ability to recover the underpaid amount from the tenant, or use the situation as an opportunity to seek something from the tenant, be it a lease renewal or some other alteration to the lease.
To avoid some of these issues in the future, landlords entering into new leases may want to consider adding language that provide some limits or requirements for CAM audits. The exact contours of those limits, though, should be carefully considered so as to provide a landlord with some options in the event that it neglects to include all CAM costs that could be recovered from a tenant under the lease.
Finally, in some instances, a CAM audit may actually provide an opportunity for the parties to completely reconsider their relationship. For instance, a CAM audit may demonstrate to a tenant that while the CAM charges being passed along by the landlord are correct, they are higher than the tenant would have to pay if it provided those services itself (e.g., the tenant may have a contract to provide services to multiple locations that results in savings that the landlord cannot duplicate). In this instance, the CAM audit will not result in a refund or reduced charges to the tenant, but it may demonstrate that the tenant would be well served to renegotiate the lease to allow it to provide those services itself, either by converting the lease to a triple-net lease or otherwise modifying its terms. And because doing so could mean that there would be no further CAM audits in the future, the landlord may be willing to agree to those modifications to the lease.
Regardless of whether you are a tenant or a landlord, a CAM audit may provide opportunities. But those opportunities are not without risk, and so you should carefully weigh the possible outcomes before proceeding. Importantly, those opportunities and risks will likely be determined, or at a minimum influenced, by the terms of your lease, meaning you would be well served to consult an attorney about your rights under the lease.
The attorneys at Boodell & Domanskis have extensive experience with all aspects of commercial leases including CAM audits. Learn more about the firm’s Real Estate, Land Use, and Zoning Law and Commercial & Civil Litigation practices.