Traditionally, retail tenants have sought to include provisions in their leases explicitly giving them the right to audit landlords’ books, particularly with regard to common area maintenance (CAM) charges. However, case law suggests that a retailer may not be out of luck if its lease is silent as to audit rights. Tenants should also be aware that even where audit rights are set out in a lease, landlords often insert restrictive clauses that seek to limit tenants’ rights to recover overcharges in court.

Tenants without audit clauses may point to cases like P.V. Properties, Inc. v. Rock Creek Village Associates Limited Partnership, 549 A.2d 403 (Md. Ct. Spec. App. 1988), in which a Maryland court ruled that lease language requiring the landlord to provide a “written statement setting forth the total actual costs” associated with CAM required not just one aggregate number representing the total amount of CAM expenses, but rather an itemized list. The court found that without such an itemization, a tenant has no way of determining whether the charges were properly charged by the landlord. In addition to the language of the lease, the court also looked to landlord’s “duty of good faith and fair dealing,” an obligation existing in some (but not all) states not to act in a way that frustrates the rights of another party to a contract.

In McClain v. Octagon Plaza, LLC, 159 Cal. App. 4th 784 (2008), a California court held that the plaintiff, a retail tenant, was entitled to review at least some of its landlord’s records supporting the landlord’s statement of CAM expenses. The McClain court also cited the covenant of good faith and fair dealing, reasoning that the tenant’s rights would be frustrated if it was required to pay the charges billed by the landlord but it could not review documentation supporting those charges, which was in the landlord’s exclusive control.

Landlords have generally resisted efforts by tenants to audit CAM charges in the absence of an express lease provision. Of course, landlords may refuse to allow adequate audits even with such provisions — in either case, litigation may be necessary before tenants can obtain the pertinent CAM records.

Where leases do contain an audit clause, landlords often attempt to insert language limiting the time period in which a tenant may bring a claim for overcharges. For example, a landlord may insist on clauses stating that CAM charges become “conclusive” and/or “final and binding” if not challenged within a particular number of months. Some courts have held that such provisions do not necessarily limit a tenant’s right to bring a claim if the CAM charges were erroneous or the result of fraud. However, the tenant should be aware of such provisions at the lease negotiation stage and when possible overcharges arise.