Part 2

Visibility and Audit Rights

Before you sign your veterinary office lease, it’s important to ensure that you have the “right to review and/or audit statements and invoices for all operating costs” negotiated into the agreement. This will ensure that you have the ability to take prudent steps to protect your clinic from unreasonable or hidden charges set forth by the landlord. If you have the right to see exactly what is being charged, it is less likely that you will be billed for something completely unreasonable.

In a Net lease, operating costs are expenses associated with the landlord’s day-to-day maintenance and operation of the property. Your landlord should keep track of all operating costs, and at the end of the fiscal year, provide you with a detailed statement of the actual expenses. As a tenant of a commercial property, you should insist on having the reasonable right to verify, audit, and where applicable, contest any charges that have been passed on by your landlord. Veterinarians who have not secured such provisions in their office lease may find that they are vulnerable and exposed to unscrupulous landlords.

Exclusions

It is customary for a tenant to cover their proportionate share of charges relating to the maintenance of the building, common areas, insurance, and various taxes; however, some landlords take advantage of their tenant’s lack of knowledge as to what are reasonable pass through costs.

What charges are unreasonable for the landlord to pass along to a veterinary tenant?

Structural building repairs or capital improvements
Real estate broker commissions
Professional or legal fees not relating to your premises
Interest on debt costs
Landlord’s personal income taxes
Marketing association fees that are not driving traffic to the building or helping your veterinary business

Retroactive Billing

It’s not uncommon for a veterinarian to receive notice from their landlord communicating that they were not billed correctly for a certain expense, dating back several years. Without proper preventive language negotiated into your veterinary office, situations like this can result in many unforeseeable future costs for which you will be liable.

Administrative Charges

Landlords typically include administrative charges in operating costs which can vary from 5%-20%. Ideally, these charges will be completely removed from application to particular clauses in the lease, or reduced to a level that is in keeping with generally accepted industry standards. Veterinarians should also beware of administrative charges applied to the landlord’s supervision of tenant repairs and alternations to the premises. While such supervision may be appropriate given the scope of work involved in the initial construction of a veterinary clinic, there are numerous instances during the lifespan of a clinic where such fees are not reasonable.

Duplications in the Summary of Operating Costs

Ensure you thoroughly review the summary of operating expenses to ensure your landlord is not charging you for the same services twice. You’d be surprised how many veterinarians are unaware that they are paying for the same expenses more than once.

Understanding Your Rights as a Veterinary Tenant

While operating costs may seem like a minor detail, hidden charges can often cost a veterinarian hundreds, if not thousands of dollars annually if the language within your veterinary office lease is not properly negotiated. It’s important to understand your rights as a veterinary tenant. If you are unsure about any language outlined in your lease or in your operating cost statement, contact a professional office lease negotiator for advice. Remember, any money saved in identifying unfair operating cost payments goes back into your wallet, not your landlord’s!

Author: Magda Mroz, Lease Analyst, Cirrus Consulting Group

Click here to read Part 1 of our blog where we cover what veterinary clinic operating costs are, common types of charges, how to protect yourself from being overcharged by your landlord, and more.