Lease Audit is a broad topic that means different things to different people. In most cases Lease Audit is associated with auditing Operating Expenses (“OE”). OE reconcilliations are an annual ritual in which the Tenant scrutinizes the Landlord’s numbers for variable and reimbursable expenses. This area of Lease Audit is covered in other articles.
A different type of Lease Audit can take place when abstracting a Lease or new Lease Amendment. The process of abstracting involves dissecting key terms and conditions contained in the Lease. The key terms can be economic as well as non-economic. In either case, they involve rights and obligations of the parties. Abstracting is the process of noting the key terms in an abbreviated form, making them easily identifiable without having to read the entire document.
An example of this form of audit took place recently. I was abstracting a Lease Amendement and uploading the key terms into an automated lease administration program. I also uploaded the Letter of Intent (“LOI”) that had been executed by the Tenant and Landlord. While reviewing the LOI, I saw that the Tenant was to receive a Moving Allowance from the Landlord. That provision was not, however, included in the Amendment. Shockingly, this oversight had been missed by the Tenant, the Tenant’s broker and attorney.
Though the Amendment had been fully executed by both parties, the Landlord agreed to reiusse a corrected Amendment with the proper reference reinstated.
This serves as a perfect example of a Lease Audit that comes by way of automating the lease administration process. Critical oversights, mistakes and errors can be uncovered merely by perfoming the abstract process. It is a good lesson in the value of abstracting as well as a great example of the benefits derived from automating the lease administration function.