What This Liability Means

Lease audits run in both directions. Landlords audit tenants for percentage rent underreporting. Tenants audit landlords for CAM overcharges. Both parties have contractual audit rights that must be exercised within specific windows.

Dollar Example: Landlord audits tenant's percentage rent reporting, claims $15,000 in unreported sales

Real Dollar Example

ScenarioLandlord audits tenant's percentage rent reporting, claims $15,000 in unreported sales
Exposure$15,000 additional rent + $3,000 audit cost allocation

If the landlord's audit finds unreported sales, you owe the percentage rent plus potentially their audit costs and interest on the underpayment.

Worst Case Scenario

A landlord audit revealing 3 years of percentage rent underreporting: $45,000 in additional rent, plus interest, plus the landlord's $8,000 audit cost. Disputed by the tenant, total exposure including legal fees: $65,000.

Warning Signs in Your Lease

  • Landlord requesting 5 years of detailed sales records — aggressive audit scope
  • Landlord alleging specific sales categories were improperly excluded

How to Limit This Liability

  • Maintain meticulous sales records for percentage rent purposes — don't give landlord any audit ammunition
  • Conduct your own CAM audit proactively — offensive auditing reduces landlord's incentive to audit you

Frequently Asked Questions

What triggers a landlord percentage rent audit?
Significant year-over-year sales decline that doesn't match market trends, exclusions from gross sales that seem unusually large, competitor success suggesting your location should perform better, or random audits in multi-tenant retail portfolios.
How should I prepare for a possible percentage rent audit?
Maintain detailed daily POS (point of sale) records. Keep annual reconciliation documentation. Track every exclusion with supporting documentation. If audited, the burden of proof for exclusions is on you — document everything.
Can I refuse a landlord's percentage rent audit?
If the lease grants audit rights, refusing is a lease default. Cooperate with the audit. Provide the records specified in the lease. Challenge findings in writing with documentation after the audit is complete.
What is the audit window for percentage rent?
Typically 2-3 years after receipt of annual sales report. After the window closes, the landlord's right to audit that period expires. Keep records well beyond the audit window — typically 5-7 years.
Can I conduct a CAM audit at the same time the landlord is auditing me?
Yes. Exercise your CAM audit rights when the landlord exercises their percentage rent audit rights. The mutual audit creates negotiating leverage — settlement of both audits simultaneously is a common resolution.