LEASE AGREEMENT REFERENCE GUIDE 1620: LANDLORD STRATEGIES TO AVOID SPACE MEASUREMENT LIABILITIES $24.95
LANDLORD STRATEGIES TO AVOID SPACE MEASUREMENT LIABILITIES
This LARG devotes itself to space measurement, and what happens when the square footage in the lease turns out to be more than the actual square footage in the premises. The first article discusses the growing army of space measurement consultants pitching their services to tenants and some simple steps the landlord can take to protect itself from measurement errors. The second article reviews the 1996 BOMA standard for office building space, the current version for office buildings. The Lease Clause Critique contains five different pro-landlord clauses related to measurement liabilities.
Targeting Commercial Landlords Who Use Rubber Rulers
Imagine this scenario: You are the landlord of a major office complex. One of your biggest tenants calls to ask for a meeting to talk about its leased space. Of course, you would be happy to meet with the tenant. Maybe the tenant is thinking about renewing its lease, or leasing additional space, right? Wrong.
At the meeting, the tenant introduces its space measurement consultant, who makes a presentation. It seems the amount of square footage specified in the tenant‘s lease is overstated. Actually, according to a new set of detailed professional CAD drawings prepared by the consultant, the actual size of the premises is 7.5% smaller than the square footage specified in the lease, using the lease’s definition of Net Rentable Area. Since the initial minimum rent was calculated on a square foot basis, and because the tenant’s premises are so large, it looks like the tenant has overpaid a total of approximately $275,000 in minimum rent during the last five years. And that’s just the beginning.
The tenant has also been paying its prorata share of operating expenses based upon an inflated figure for the premises. When the tenant’s proportionate share is recalculated using its real net rentable area, it appears the tenant has overpaid $103,000 in operating expenses during the same period. The tenant hands you your copy of the new drawings and a schedule showing the overpayments for your review, and assuming they are correct, asks if it could expect your check remitting the overpayments in, say, two weeks? You try your best to smile, and start thinking about having a couple of martinis for lunch.
Audit Firms Proliferate
It’s illuminating to search the Internet using the search words “lease audit” and “measurement.” They turn up a slew of firms offering to verify the amount of square footage in a tenant’s premises. If that turns out to be less than the amount stated in the lease, they will go after the landlord for a refund for overpayments of minimum and additional rent. If the tenant wishes, these audit firms will expand the scope of the audit beyond space measurement to a complete examination of the landlord’s imposition of operating costs and whether it is consistent with the lease.
Almost all of these firms will do their job on a contingency basis—if no discrepancy is found, they don’t get paid. If they do discover overcharges to the tenant, they take a percentage of the amount recovered from the landlord as their fee. For small tenants, the contingency is often around 50%. For large tenants with multiple locations, the audit firms will settle for a smaller cut, something like 33%. But one thing is clear—the tenant really has very little to lose by hiring such a consultant, many of whom pitch their services as just another element of the tenant‘s ongoing corporate cost containment program. As the promotional material from one consultant says, “Landlords know that tenant audits are common. It is just part of doing business.”
The Ruler Meets the Computer
Many of the firms specializing in space measurement for tenants use computer aided design (CAD) software of relatively recent vintage. Such software, when based upon accurate drawings taken in the field (i.e., in the premises), can produce extremely accurate drawings and calculations of square footage. The output from such computerized applications can be more accurate than the original as-built drawings and the tenant improvement drawings produced for the building and the premises by the landlord’s own design consultants. This is particularly true when the original drawings are more than five years old, or if they were drawn by hand.
The Potential for Space Measurement Liabilities
There’s little doubt the landlord can face big dollar liability if it overstates the actual size of the premises in the lease. This is particularly true when:
A Landlord Protection Strategy
How can the landlord protect itself from tenant claims that it overstated the size of the premises? The obvious answer it to have meticulously accurate drawings prepared by a design professional. If the property involved is older, it is probably worth the money to have new drawings for the building made, or at least to have the existing drawings verified (based upon new field measurements) by a second design professional.
If the form lease for the property does not contain specific carefully drafted definitions of the usable area and the net rentable area of the premises, plug them into the form now for future deals. The landlord also should satisfy itself that the lease definitions for such terms and the methodology used to prepare the space drawings are entirely consistent.
Commercial landlords should also consider including specific language in the form lease for the property dealing with inadvertent unintentional space measurement errors. Some possibilities (see the Lease Clause Critique below) include: