Expert: Jim Avancena, CPM - 6/23/2010

Question
QUESTION: Dear Sir:

I have a commercial lease that will expire in seven months.  My Landlord just sent me a letter requesting an audit for the last three years of sales.  I don't want to bother with this audit because our gross sales doesn't even nearly exceed the threshold  where the landlord is entitle to additional rent. They are legally entitle to see my books but are they entitle to see my tax records if i choose not show them?  What typically happens if i don't cooperate with the audit?

Thank You,
Kim

ANSWER:   Kim -

You have not indicated the timing of the audit matters up until today, but it may be best if you contact a Landlord/Tenant legal specialist right away.  You should be able to find an attorney that specializes in Landlord/Tenant law by calling the local American Bar Association office.

Allow me to explain what I can about the questions you have asked.

Usually the lease will stipulate EXACTLY which records the landlord has a right to review as part of the audit.  If you are required by your lease to allow the landlord to audit your financial materials, you must provide only the materials that the lease defines.   

Review the portion of your lease that provides for the audit and carefully examine the words used to describe what financial materials the landlord may audit.  If your lease does not define the materials the landlord may review, you should write to the landlord NOW, via certified mail, at the address specifically indicated in your lease, (Often this area of the lease is titled "NOTICE") and tell the landlord to reply in writing listing EXACTLY which materials it wishes to review as part of the audit in advance of the actual start of the audit.

When the landlord's written response arrives, review the listed materials it wishes to review and see if there is anything listed that you do not wish to provide as part of the audit.   The landlord may not request access to your tax records and you will not have to show it your tax records as part of the audit.  If your tax records are requested, and your lease stipulates that the landlord has the right to review your tax return(s), you should contact an attorney that specializes in Landlord/Tenant law in your area immediately and have the attorney advise you further.

I you do not provide the landlord with the materials that your lease defines, you will likely be found in default of the terms of your lease by the landlord and your attorney will need to advise what exposure you may have according to the laws in your jurisdiction.   

If you are in a jurisdiction that allows "Self-Help" on the part of the landlord, and your lease provides your landlord with the right to Self-Help, it would be wise to contact your attorney IMMEDIATELY.  Self-Help is a legal term that your attorney will need to explain, however, the right to Self-Help very generally allows a landlord to accelerate certain of its actions in an effort to resolve certain disputes with its' tenant.  One example of Self-Help that most people have heard of is when a landlord changes the locks to a tenants store or office so the tenant cannot access the space again until the matter is resolved between the parties.   This is only one example of a Self-Help action and your attorney will have to advise you if such rights exist, and are legal, in your area.

Please forward another question if I can be of further assistance in this regard.

Do not delay action in this regard.

Good luck,

-Jim

---------- FOLLOW-UP ----------

QUESTION: Dear Mr.Avancena,

Thank You so much for answering my question.  The Landlord letter requesting the audit stated that I need to call their contact person and arrange a time that is convinient for us for the audit.  My lease states that they have the rights to review my "books, accounts and records."  They are interpreting that as my tax records also.  They not only want to see my Federal Income tax records but also my Sales tax reports.  We have gone through an audit six years ago and we only needed to provide our invoices and general ledgers.  I feel that they are defitnitely abusing this situation to see what they can get out of me before my lease runs out in seven months. I am already in default of my lease because we owe them a month worth of back rent.  From your experience, when a giant public company like our Landlord request to see these types of documents from their tennants, they are obviously settings things up to go after me right?  

Thanks You,
Kim

Answer
Kim -
It is difficult to generalize about such things.   It may be that the landlord has hired someone new to perform audits and that person is simply looking to show off to their new employer by being aggressive.   Audits are usually a hassle simply because of the effort involved - even if there is no problem discovered.

You could respond in writing and say that you are prepared to give them access to the same record materials you provided; and they reviewed, at your previous audit six years ago.  Did you provide Federal Tax Returns and Sales Tax reports during the last audit?  How do you know that the landlord interprets the lease language to include your Federal Tax Return?  Does your lease text regarding the audit actually contain the words "Federal Tax Returns" and/or "Sales Tax reports"?

If you believe that you are being harassed by the landlord unfairly, keep in mind that "Contact" is not only verbal, it could mean written communication.  You should send them written correspondence - via certified mail always - giving the landlords' person several proposed times for the audit or ask that they confirm one of those proposed times with you or propose alternative times for the audit.  The point is that it is always good to put everything in writing during a dispute and proceed at a pace that you can maintain while still running your normal day to day business operations.

You should always expect that unpaid rental obligations will be pursued as far as possible to assure collection by your landlord.  Back rent can be pursued through the local landlord/tenant or civil court and the result of that action can quickly turn into an eviction (usually within a day or days later) after the court rules against you for unpaid rent.  The landlord MAY have already filed an action to collect any back rent in the local court.   If so, you should be provided a notice by the court to attend the trial and when it will be.

You should watch carefully for a notice of a court date requested by the landlord.  Further, if you have somehow missed the court date, and a notice of EVICTION is affixed to the door of your premises, review carefully what the notice states.   It usually means that the court case sought by the landlord has already occurred, you lost, and a US Marshall is coming to your premises the next day with appropriate supporting staff to remove ALL of your possessions from the premises.   

If this is the case, the local police authority will arrive BEFORE any attempt is made to enter your premises and will remain at your premises until everything has been removed.   In some cases - not always - you may be allowed to present the US Marshall, Sheriff, or other police person that presents themself at your entrance to start the eviction, with certified funds or cash in the amount indicated on the eviction notice BEFORE the eviction starts. The police person in charge can cancel the eviction IF your payment matches the amount indicated on the Writ For Eviction.   This is not the case in every situation or in all jurisdictions however.  You will need to confirm this with your local court.  In some cases a local police office can confirm the local law in this regard.

Do not, under any circumstances, attempt to interfere with the eviction once the officer in charge starts the process.  

If you know that an eviction is going to occur and you have been provided a Notice of Eviction, you should remove any property of value in your premises BEFORE the day of the EVICTION.   Check to be certain that you may do this according to the local law in your jurisdiction.   

It would be best for you to pay the back month of rent and avoid any court proceedings.  Let's hope an eviction is not how this matter is settled.

Please send any follow-up questions you have if I can assist you any further in this regard.

Good luck.

- Jim