lease-compliance-auditor

Lease Compliance = Ongoing verification that all parties fulfill their contractual obligations under the lease.

Purpose:

• Prevent defaults and disputes
• Maintain insurance/environmental protection
• Preserve lease enforceability
• Protect property value
• Support litigation defense

Key Categories:

1. Insurance compliance
2. Environmental compliance
3. Use clause compliance
4. Financial covenant compliance
5. Administrative compliance (reporting, notices)

Insurance Compliance

Required Coverages (Typical):

• Commercial General Liability (CGL): $2M-$5M per occurrence
• Property Insurance: Replacement cost of tenant improvements
• Business Interruption: 12 months minimum
• Additional Insured: Landlord as additional insured on CGL
• Waiver of Subrogation: Mutual waiver

Annual Requirements:

• Certificate of Insurance delivered 30 days before expiry
• Policy must name landlord as additional insured
• 30-day notice of cancellation clause
• Coverage limits maintained throughout term

Red Flags:

• Expired certificates
• Insufficient coverage limits
• Landlord not named as additional insured
• No waiver of subrogation

Environmental Compliance

Tenant Obligations:

• No hazardous materials storage (except approved)
• Obtain environmental permits
• Comply with all environmental laws
• No soil/groundwater contamination
• Phase I/II reports (if required)

Landlord Monitoring:

• Annual environmental questionnaire
• Site inspections
• Review permits and manifests
• Monitor waste disposal practices

Red Flags:

• Unauthorized hazmat storage
• Missing permits
• Environmental violations/fines
• Visible contamination

Use Clause Compliance

Permitted Use Verification:

• Tenant operates only within permitted use
• No prohibited activities
• Zoning compliance maintained
• Municipal business license current

Red Flags:

• Business type change without consent
• Operating outside permitted hours
• Zoning violations
• Nuisance complaints

Step 1: Establish Compliance Checklist

Extract from lease:

• All tenant obligations
• All landlord obligations
• Notice requirements
• Delivery deadlines
• Performance standards

Create tracking matrix:

```

Obligation | Frequency | Deadline | Status | Last Verified

```

Step 2: Insurance Audit

Annual Process:

1. Request certificate 60 days before expiry (allow time for corrections)
2. Verify coverage limits match lease requirements
3. Confirm landlord named as additional insured
4. Check waiver of subrogation included
5. Verify 30-day cancellation notice provision
6. Maintain copies in lease file

Non-Compliance Action:

• Send notice to cure (10 days)
• If not cured, landlord may obtain insurance and charge tenant
• Potential default if persistent non-compliance

Step 3: Financial Covenant Monitoring

If lease requires:

• Annual financial statements (120 days after year-end)
• Maintain minimum DSCR (e.g., 1.25)
• Maintain minimum net worth
• Maximum debt-to-equity ratio

Verification:

1. Receive financial statements
2. Calculate ratios
3. Compare to covenant thresholds
4. Document compliance or breach

Breach Action:

• Notice to tenant
• May trigger additional security requirement
• Potential default if material breach

Step 4: Site Inspection

Periodic inspections (quarterly/annually):

• Verify permitted use
• Check property condition
• Observe alterations/improvements
• Environmental observations
• Signage compliance
• Parking compliance

Document findings and follow up on violations

Step 5: Notice & Reporting Compliance

Track:

• Annual financial statements delivered
• Insurance certificates delivered
• Option notices delivered timely
• Environmental reports submitted
• Audit rights exercised

Maintain documentation for dispute resolution

Insurance Non-Compliance

Expired Certificate:

• Coverage lapsed
• Action: Immediate notice to cure, obtain landlord's policy if not cured

Insufficient Limits:

• $2M CGL required, $1M provided
• Action: Notice to cure, increase limits

Landlord Not Additional Insured:

• Policy doesn't name landlord
• Action: Request endorsement, reject certificate until corrected

Environmental Violations

Hazmat Storage Without Approval:

• Tenant storing chemicals not disclosed
• Action: Immediate notice, require removal or approval process

Environmental Fines:

• Municipal violation notice issued
• Action: Demand proof of remediation, may trigger indemnity claim

No Permits:

• Operating without required environmental permits
• Action: Notice to obtain, potential lease default

Use Clause Violations

Operating Outside Permitted Use:

• Office tenant subletting to manufacturing
• Action: Cease and desist, require consent for use change

Zoning Violation:

• City issues zoning violation notice
• Action: Demand immediate compliance, tenant indemnifies landlord

Financial Covenant Breach

DSCR Below Threshold:

• Lease requires 1.25, tenant at 1.1
• Action: Require additional security deposit or guarantee

Late Financial Statements:

• Due 120 days after year-end, not received
• Action: Notice to deliver, potential default

This skill is automatically loaded when:

• User mentions: compliance, insurance audit, environmental compliance, use clause, covenant
• Commands invoked: /insurance-audit, /environmental-compliance
• Reading files: Insurance certificates, environmental reports, compliance documents

Related Commands:

• /insurance-audit [insurance-policies] - Verify insurance compliance
• /environmental-compliance - Review environmental provisions and compliance
• /default-analysis - Assess compliance violations as defaults

Example 1: Annual Insurance Audit

Lease Requirements:

• CGL: $5M per occurrence
• Property: Replacement cost
• Business Interruption: 12 months
• Additional Insured: Landlord
• Waiver of Subrogation: Yes

Certificate Received:

• CGL: $2M per occurrence ❌
• Property: Actual cash value ❌
• Business Interruption: 6 months ❌
• Additional Insured: Not shown ❌
• Waiver of Subrogation: Not shown ❌

Audit Result:

```

INSURANCE COMPLIANCE AUDIT - FAIL

Deficiencies:

1. CGL coverage insufficient ($2M vs. $5M required)
2. Property insurance on ACV basis (replacement cost required)
3. Business interruption insufficient (6 months vs. 12 required)
4. Landlord not shown as additional insured
5. Waiver of subrogation not shown

Action Required:

• Reject certificate
• Issue notice to cure within 10 days
• Provide corrected certificate meeting all lease requirements
• If not cured, Landlord may obtain insurance and charge Tenant

Status: NON-COMPLIANT

```

Example 2: Use Clause Violation

Lease Permitted Use: "General office purposes only"

Site Inspection Findings:

• Tenant operating gym/fitness studio
• Equipment observed: treadmills, weights, showers
• Signage: "ABC Fitness - Personal Training"

Compliance Assessment:

```

USE CLAUSE COMPLIANCE AUDIT - VIOLATION

Permitted Use: General office purposes

Actual Use: Fitness studio / personal training

Violation: Material change in use without landlord consent

Concerns:

• Increased liability (fitness injuries)
• Increased building insurance premiums
• Higher wear/tear (showers, equipment)
• Parking impact (clients vs. office workers)
• Potential zoning violation (may require fitness license)

Action Required:

1. Cease and desist notice
2. Require tenant to:

a) Cease fitness operations, OR

b) Request formal consent to use change

1. If consent considered:

- Amend permitted use clause

- Increase insurance requirements

- Charge higher rent (fitness use = higher value)

- Obtain zoning confirmation

Status: VIOLATION - Immediate action required

```

---

Skill Version: 1.0

Last Updated: November 13, 2025

Related Skills: commercial-lease-expert, default-and-remedies-advisor, lease-abstraction-specialist

Related Commands: /insurance-audit, /environmental-compliance, /default-analysis