Commercial Real Estate Question (1 Viewer)

[someone]

Our landlord sent us the 2018 reconciliation of NNN expenses. They sent a letter vaguely outlining the charges line by line. In my contract, it states I can request documentation for up to 7 days after receiving this letter. While many things seemed out of whack to me, I'm a first time commercial tenant and wasn't sure if it was par for the course or not. So I decided to ask about a landscaping charge of over $18,000 (for the year) because we didn't see a single landscaper the entire year and all the beds around the property haven't been touched. I asked for specific invoices with dates because I am certain they haven't been out to do the work.

Instead of invoices, my landlord sent me a bogus response with a general ledger attached showing monthly payments on an excel sheet that I assume he just typed up. I am fairly certain I've now caught him in a lie. With that said, I'm in year 2 of a 7 year lease and would like to maintain a decent relationship with the landlord and I don't have concrete proof yet that it's a lie. Here's the section from our lease regarding audits:

24.2 Audit of Propertv Common Area Expenses, Shopping Center Common Area
Expenses, Insurance Charges and Tax Charges. Landlord agrees to maintain such records as to
any and all costs and charges (including, without limitation, Property Common Area Expenses
(Section 23.25), Shopping Center Common Area Expenses (Section 23.34), Insurance Charges
(Section 10.3) and Tax Charges (Section 16.3)) passed through to Tenant under this Lease
(individually and collectively, the "Charges") as are customarily maintained in accordance with
generally accepted accounting principles. Within thirty (30) days of requesting same, Tenant and
its duly authorized representatives shall have the right to receive from Landlord in an electronic
format (as is ordinarily kept in Landlord's course of business), supporting documentation
evidencing that the Charges are correct (including third party invoices). If Tenant desires to review
or audit any of Landlord's books and records pertaining to the Charges or Landlord's calculations
of Tenant's Proportionate Share thereof, Tenant may do so by providing written notice thereof to
Landlord within three (3) months after Landlord's annual reconciliation statement, but no more
than once during any calendar year. Such review or audit shall take place by Tenant, its employees
or agents (but in no case by a representative or agent charging or receiving a fee on a contingent
fee, percentage basis or other similar basis) at Landlord's corporate offices. Tenant shall provide
Landlord with thirty (30) days' prior written notice of the date Tenant wishes to conduct such audit.
Tenant shall pay all costs of such audit or review; provided, however, if the review or audit
reveals that Landlord overcharged Tenant by more than ten percent (10%), Landlord shall pay to
Tenant its reasonable costs and expenses incurred by Tenant in performing such audit, contingent
upon Tenant providing Landlord with a copy of such audit. Landlord shall reimburse Tenant for
the amount of any overcharge determined pursuant to this Section 4.6 within thirty (30) days of
Landlord's receipt of Tenant's written request for same.

My initial request of the landscaping invoices was within 7 days of receiving the NNN reconciliation letter, but due to their delayed responses, we are now past that window. We are still well within the window of requesting an audit, however. In reading the language and from previous experiences, do you folks think I can request to see documentation for all the line items now (even though it's been more than 7 days) given they haven't been forthcoming with the landscaping invoices? Or is my only course of action now a full audit? I know this isn't a forum for actual legal advice, but I'm asking for advice as a friend of Saintsreport. I was thinking about responding and nicely asking for invoices again, while including this excerpt from our contract on the email. If he still fails to reproduce the invoices for the landscaping, I would then request supporting documentation for the remainder of the expenses. Or should I go ahead and request a formal audit?

 

[buzd]

You can always request anything you want - the question is whether they'll give it to you. I would nicely request documentation for whichever line items you want, and if they cite the lease as a reason not to, then proceed with requesting the audit.

Do everything in writing. If the landlord calls you, make notes, and follow up with an email documenting what was discussed and/or agreed to.

 

[superchuck500]

My initial request of the landscaping invoices was within 7 days of receiving the NNN reconciliation letter, but due to their delayed responses, we are now past that window. We are still well within the window of requesting an audit, however. In reading the language and from previous experiences, do you folks think I can request to see documentation for all the line items now (even though it's been more than 7 days) given they haven't been forthcoming with the landscaping invoices? Or is my only course of action now a full audit? I know this isn't a forum for actual legal advice, but I'm asking for advice as a friend of Saintsreport. I was thinking about responding and nicely asking for invoices again, while including this excerpt from our contract on the email. If he still fails to reproduce the invoices for the landscaping, I would then request supporting documentation for the remainder of the expenses. Or should I go ahead and request a formal audit?

I don't see that audit is limited to prior requests so I would think that your audit rights are for all pass-through expenses, not just those you questioned initially. I don't see anything about a seven-day period, so not sure what you're referring to. As long as you are still within your audit-request window, I think you can ask for additional support in a less formal or intrusive way.

You're certainly within your right to request supporting documentation (and I wouldn't consider his own ledger to constitute supporting documentation) for pass-through charges. I would be extra nice / professional about it and just let him that you're not challenging him or anything like that, you're just running a business and you have standards for documenting expenses that you're trying to maintain, nothing more. But be prepared for blowback, especially if he is indeed committing fraud because your request introduces real jeopardy for him and it might result in irrational response.

But its certainly in your interest and rights to see expense-support. Like Buzd said, make sure you document everything including phone notes. For any oral discussions that contain commitments one way or the other, follow them up with written correspondence (email or printed mail with tracking) that memorialize the conversation.

 

[someone]

I don't see that audit is limited to prior requests so I would think that your audit rights are for all pass-through expenses, not just those you questioned initially. I don't see anything about a seven-day period, so not sure what you're referring to. As long as you are still within your audit-request window, I think you can ask for additional support in a less formal or intrusive way.

You're certainly within your right to request supporting documentation (and I wouldn't consider his own ledger to constitute supporting documentation) for pass-through charges. I would be extra nice / professional about it and just let him that you're not challenging him or anything like that, you're just running a business and you have standards for documenting expenses that you're trying to maintain, nothing more. But be prepared for blowback, especially if he is indeed committing fraud because your request introduces real jeopardy for him and it might result in irrational response.

But its certainly in your interest and rights to see expense-support. Like Buzd said, make sure you document everything including phone notes. For any oral discussions that contain commitments one way or the other, follow them up with written correspondence (email or printed mail with tracking) that memorialize the conversation.

Thank you and buzd for your always helpful responses.

I think I got the seven days from the reconciliation letter. It mentions that I have 7 days to request documentation and 30 days to pay (over $10k). Unless I missed it, I don't see anything about a 7 day window in my lease. Therefore, I imagine I shouldn't be restricted.

Also, would you think I need to pay the difference before being allowed an audit?