Understanding Square Footage and How it Affects Your Lease
Previously, my colleagues wrote blogs regarding commercial leasing considerations for tenants and commercial evictions, but today I am going to cover one of the most fundamental provisions of the lease – square footage.
Most commercial tenants are paying rent on a per square foot basis. Accordingly, there are three major aspects of a commercial lease that address square footage: 1) the “Premises” or “Building”; 2) Usable or “Rentable” Space; and 3) Percentage of Common Area Expenses. This article will address only the Premises and Rentable Space provisions of a standard Commercial form lease, and a later article will discuss the Common Area Expenses and Audit rights.
The “Premises” versus the “Building”.
The Premises is a description of how much space the tenant is renting and where it is located. It should contain the address, and if a portion of a building is being rented, the description of the section of the building (for example – 2nd Floor), and the “rentable” square feet. Looking at the “AIR Commercial Real Estate Association Standard Multi-Tenant Office Lease – Net” the Premises is defined in Paragraph 1.2(a) and it goes on to provide non-exclusive rights to the Lessee for the Common Areas and define the “Building.” Depending on the type of property, Premises and Building may have different meanings. Premises could include things like the parking lot or private walkways, which is a greater area than just the Building located at 123 Main Street. It is important to distinguish where the Tenant has exclusive responsibility (and liability) and where the responsibility is shared by all the tenants of the property or otherwise reserved to the Landlord.
For example, recently, a popular local restaurant was named in a slip and fall lawsuit. The plaintiff named both the restaurant (tenant), and the landlord (property owner). A dispute over indemnity claims arose between the tenant and the landlord due to an ambiguity in the Lease where “Premises” neglected to include also the parking lot. Tenant took the position that Premises was simply the standalone building and the Landlord reserved rights to the parking lot. Ultimately we were able to convince the Tenant and its insurer to defend the Landlord in the action, however, such a skirmish could have been avoided if the parties had been more careful in the initial drafting of the Lease.
What is “Rentable Square Feet” ?
Base rent is normally calculated by multiplying the Rentable Square Feet by a certain dollar amount. However, the AIR form favors the Landlord (or Lessor) and in Paragraph 2.4 “Acknowledgements” basically inserts a waiver provision:
2.4 Acknowledgements. Lessee acknowledges that: (a) it has been given an opportunity to inspect and measure the Premises, (b) it has been advised by Lessor and/or Brokers to satisfy itself with respect to the size and condition of the Premises (including but not limited to the electrical, HVAC and fire sprinkler systems, security, environmental aspects, and compliance with Applicable Requirements), and their suitability for Lessee’s intended use, (c) Lessee has made such investigation as it deems necessary with reference to such matters and assumes all responsibility therefor as the same relate to its occupancy of the Premises, (d) it is not relying on any representation as to the size of the Premises made by Brokers or Lessor, (e) the square footage of the Premises was not material to Lessee’s decision to lease the Premises and pay the Rent stated herein…”
My preference is to strike this provision and also add a provision that describes what measuring standard the parties are using. For example, many commercial experts rely on the Building Owners and Managers Association (“BOMA”) Guidelines to determine rentable area. BOMA considers “Rentable Area” to be calculated by measuring the inside finished surface of the dominant portions of the permanent outer building walks, excluding certain intersecting vertical walls. This is not the same as “usable area” which could exclude things like closets for boilers, HVAC, venting, etc. That is where the load factor comes in, and tenants can determine whether a building has a high load factor by comparing rentable area with usable area.
Even if the waiver is left in, it does not insulate a Landlord from a fraud or fraudulent inducement claim. In the case of McClain v. Octagon Plaza, the Court determined that the tenant’s allegations in the complaint were sufficient to establish elements of a claim for intentional or negligent misrepresentation. McClain operated a teaching supply store and leased space from a shopping center in Valencia, California. She had the AIR Standard Commercial Lease and later sued the Lessor over a dispute on CAMs charges and then against over misrepresentation of the square footage of both the Building and her rented premises. Apparently, McClain learned of a discrepancy between what the owners had assured her was the square footage of both the building and her unit, versus what the owners had reported on their application for earthquake insurance. As a defense, the Lessor noted that the Lease barred McClain from raising this challenge over square footage in Paragraph 2.4.
The McClain Court ruled in favor of the tenant and stated:
“The key issue, therefore, is whether the terms of the lease rendered McClain’s fraud claim untenable.2 Section 1668 of the Civil Code provides that “[a]ll contracts which have for their object, directly or indirectly, to exempt anyone from responsibility for his own fraud, … whether willful or negligent, are against the policy of the law.” This provision encompasses intentional and negligent misrepresentation. (Blankenheim v. E.F. Hutton & Co. (1990) 217 Cal.App.3d 1463, 1471–1473, 266 Cal.Rptr. 593.) Accordingly, as Witkin explains: “A party to a contract who has been guilty of fraud in its inducement cannot absolve himself or herself from the effects of his or her fraud by any stipulation in the contract, either that no representations have been made, or that any right that might be grounded upon them is waived. Such a stipulation or waiver will be ignored, and parol evidence of misrepresentations will be admitted, for the reason that fraud renders the whole agreement voidable, including the waiver provision.” (1 Witkin, Summary of Cal. Law, supra, Contracts, § 304, p. 330.)” [McClain v. Octagon Plaza, LLC 159 Cal. App.4th 784, 794. (2008)
TAKEAWAY -> However, absent the elements of fraud, the waivers in Paragraph 2.4 would be sufficient to prevent the tenant from later claiming an error in the calculation of square footage so it behooves the parties to assure themselves of the accuracy of the measurements before the Lease is signed.
If you have a real estate matter that you feel needs legal representation, especially regarding commercial lease disputes, please contact our office at (650) 327 – 2900 or visit us on the web at www.BrewerFirm.com. We would be happy to help you.