Lease Audits: How and Why to Conduct One Before Leasing Season This Year

Preparing for a Spring Lease Audit

As a landlord, you're familiar with the complexity of leases—every clause matters in setting the ground rules for a successful tenancy, and mistakes or overlooked rules can easily become costly for either party. This problem only grows with commercial leases, which tend to be more complex and include different types of charges for tenants.

Luckily, you can mitigate discrepancies by conducting regular lease audits of your properties that review your lease information to ensure compliance. In this article, we'll cover what lease audits are, how they work, and why they're important for your rental business so you can rest assured that your lease terms are up-to-date and are being followed by all parties.

What is a Lease Audit?

So, let's start with the basics: What is a lease audit?

A lease audit is a procedure that checks every aspect of a lease to help confirm that its terms are being followed by both landlords and tenants. It's important in a lease audit that every type of document is accounted for. This means charges to tenants, expense documents, lease specifics, and even communication between a tenant and landlord should be examined and cross-checked by a lease auditor to guarantee a thorough and fair audit.

Many people compare lease audits to IRS audits. In an IRS audit, auditors check that the numbers you reported on your taxes, like tax credits, deductions, and income match with records of how much you actually made or spent in a year. Similarly, lease audits look closely at leases (typically commercial and complex) and payments to check if the amounts being charged or paid match with the numbers and procedures laid out in the lease.

Lease audits ultimately ensure that every part of a lease is being followed or enforced correctly from a legal standpoint, confirming that you aren't losing out on income or taking too much from tenants each month. It sounds simple, and it can be, but you might not always realize something's off—especially when utility payments, lease concessions/discounts, pet rent, and other variables are introduced.

How to Conduct a Lease Audit

If you're looking to conduct an audit for your units, it's important to understand lease audit procedures and how doing an audit works in practice. Let's look below at the steps of conducting a lease audit for landlords:

1. Gather lease documents

In order to audit your lease information, you first have to collect it. This means that you must gather every possible document relating to your leases and their expenses. Invoices to tenants, expense sheets, the lease contracts themselves, and communications between you and your tenant about the lease should be pulled together into one place so you can cross-check the documents during your audit.

2. Refamiliarize yourself with your leases and their terms

Next, you should read through your leases in detail. Getting down to the nitty gritty of your lease types as well as obligations and conditions may help you understand a clause more clearly or may be a refresher on specific rules so you can record accurately in your audit.

Be sure to look for renewal dates, specific dollar amounts, or any amendments to the lease that may have affected your income since the last time you reviewed the lease.

3. Compare your numbers with lease terms

After looking over what each lease agreement contains, it's time to check the accounting information connected to them. This means looking item by item at security deposit amounts, monthly expenses, invoices to tenants, and checking them against your leases for any over- or underpayments. This is where you're most likely to run into mistakes—maybe you've been undercharging your tenant for community area cleaning fees for several months, causing you to lose out on hundreds of dollars.

4. Look specifically at modifications, renewals, terminations

It's important to review your leases for any changes from the original document. Any amendments or modifications, renewal dates, or terminations are important for establishing timelines and maintaining accuracy in your audits. For example, if a lease has renewed and additional rental fees have increased from the original base rent, it's important to ensure that the correct rates are being charged.

5. Handle any errors or discrepancies

Now that you've looked over each of your documents in detail and checked them against each other, you must handle any errors or discrepancies you came across and flagged during the process. If you found evidence of double-billing, overcharges, missed billing, unauthorized payments, or any other number of mistakes, it's time to address and solve the issues to balance your books and resolve any disagreements between landlords and tenants.

6. Centralize your lease documents

Moving forward, it's important to centralize your documents. With online lease signing on the rise, property management software like Innago helps to keep all of your important leasing documents in one easy to access place, so you can find lease information in the office and on the go. Becoming organized with online lease signing, automatic rent payments, online tenant screening, and more can help automate the renting process so your numbers come back correct and your job is that much easier.

Additionally, you may consider using a lease auditing software that can streamline your lease auditing processes and offer robust reporting on all of your accounting information. Automating your lease audits can provide compliance with accounting standards and keep you informed on the status of your leases.

7. Consider hiring a professional auditor

If your portfolio is large and all of this sounds like your worst nightmare, you're not alone. Lease audits aren't necessarily a burden that landlords have to carry themselves. If you don't feel confident conducting your own lease audit, consider hiring a lease auditor who has in-depth knowledge and excellent lease interpretation skills. Lease auditors are experts in lease language and the systematic processes of lease audits, so they're a worthwhile investment who can ensure you're following real estate laws and standards. You can also investigate various lease audit software options to potentially automate the process.

Why Lease Audits Are Important for Landlords

A disgruntled tenant who believes they are being overcharged or has another dispute with you may ask for a lease audit, but you can and should be conducting lease audits as well.

For landlords with simple residential leases or few properties, a lease audit may not be a high priority. But for commercial landlords or landlords with a high number of properties, conducting regular lease audits will stop errors in their tracks so that you can revise and fix them as quickly as possible.

Lease audits may find leases with overcharges or undercharges to tenants, but can also help identify misinterpretations or misunderstandings of the lease's terms. This not only helps resolve landlord/tenant disputes, but also helps you balance your books so that you aren't collecting or expending an incorrect amount of money from your tenants each month.

Conclusion

Lease audits can be intimidating, but are a necessary part of running a rental business, especially for commercial landlords. By periodically checking your lease terms, you'll be able to breathe easily knowing that your books are balanced and your lease is in tip-top shape.

FAQs

What are the most common issues uncovered during a lease audit?

Lease audits typically discover issues like incorrect rent charges, missed fee increases, double billing, or failure to apply lease amendments. They can also reveal misunderstandings of lease clauses, such as maintenance responsibilities or shared expense allocations, which can lead to financial discrepancies.

Can tenants request a lease audit?

Yes, tenants, especially in commercial settings, can request a lease audit if they suspect billing errors or unclear charges; however, being proactive by conducting your own audits prepares you for these situations and builds trust and transparency with tenants.

What should I do if I find an error during a lease audit?

If you uncover an error, address it immediately by verifying the discrepancy, documenting your findings, and communicating with the tenant if necessary. Resolving the issue quickly helps maintain accurate records and positive landlord-tenant relationships.

Is hiring a professional lease auditor worth the cost?

For landlords with complex leases or large portfolios, hiring a professional can be a great investment. Auditors bring expertise and efficiency, often identifying issues that might otherwise go unnoticed and helping ensure full compliance with lease terms.

What documents are most important for a lease audit?

Important documents include the signed lease agreement, any amendments or addendums, rent rolls, invoices, payment records, expenses, and tenant communications. Having a paper trail ensures you can accurately verify that all charges and terms align with the lease.