Why Accuracy Matters in Square Footage

ANAHEIM, CA—If a space's sizing is incorrect in a lease or sale document, tenants can sue landlords for alleged excess rent, according to speakers at AIR Commercial Real Estate Association's recent contract forms review seminar here. The sold-out event was attended by nearly 200 people looking to stay current on sale and lease forms and addenda for industrial, office and retail facilities that are widely considered the standard in the industry.

Presenters included Richard Riemer, attorney at law, and veteran real estate professional John Pagliassotti, who comprise AIR's forms committee. The committee utilizes these seminars, in part, to guide them in constantly updating the forms, in large part via feedback from attendees. Riemer and Pagliassotti highlighted salient elements of virtually every AIR form—more than 50—and fielded questions from the audience. In one of the most significant updates, Riemer alluded to the recent “Octagon Plaza” court case that disclosed potential problems in the way properties are described in sale and lease transactions. Typically, landlords and their brokers have described the units using square footage; however, in the Octagon case, the tenant claimed that the landlord had fraudulently overstated the square footage and alleged that the size of the unit was significantly less than the lease stated. As a result, the tenant was able to sue the landlord in an effort to try to collect the alleged excess rent despite language in the AIR lease to the contrary.

Referring to AIR's standard industrial/commercial single-tenant lease—net, the presents cited a series of suggestions for brokers, including being certain they made tenants aware of what they are obligated to maintain in the building and to be sure to get the landlord's approval for any alterations or utility installations they pursue.

Presenters also emphasized that the single-tenant lease-net document spells out what tenants are responsible for as regards their pro rata share of common areas. 'There's no cap on these charges,” said Pagliassotti. “It's an open checkbook for the landlord. They can charge what they want for common-area maintenance. Make sure if you represent a tenant that they understand this.”

Referring to the standard multi-tenant office lease—gross, Pagliassotti said that because common areas are inside the building, they are not exclusive to any one tenant. In this instance, you have to use square footage to determine common-area maintenance charges. “Get an architect's measurement to be agreed upon by tenant and landlord.”

Commenting on the standard multi-tenant shopping-center lease—net, the speakers underlined that if the lease included a percentage-rent provision, it virtually made the landlord “your partner.” They also said that the center's merchants' association is controlled by the landlord, who can do virtually anything he or she wants.

Pagliassotti said the guaranty of lease form may be the “most onerous” of the AIR forms. “Don't let friends sign lease guarantees because they obligate the guarantor to the same terms as the tenant. The tenant could be violating his lease in numerous ways, and the guarantor may not know it. If you know anyone who is considering signing a guarantee, let them know what they are in for—you're better off being a co-tenant.”

Panelists also advised brokers about the distinction between a lease assignment and a sublease. With a sublease, you're not transferring everything—you are doing that in an assignment.

Underscoring the disclosure regarding real estate agency relationship form, which became mandatory in January of this year, Riemer said, “The first time you have a serious discussion with your prospective client, ask them to sign this form, which discusses the various types of agency—dual, exclusive, etc.” Pagliassotti added, “Notify parties immediately as to your agency status. Don't wait until the purchase and sale agreement is signed. Disclosure is incredibly important. This is critical because agency is the highest form of fiduciary responsibility. You don't want to be a dual agent unless you absolutely have to.”

Midway through the forms session, Pagliassotti urged brokers to purchase the forms user's manual, which he said has a commentary on every paragraph of every form I bullet form, enabling readers to avoid having to read the entire document.