Lawyers are great assets for any real estate agent or realty team. They’ll help you craft a legally acceptable arrangement, but they have their limits.
They won’t help you create a good business deal because that’s your job. If you don’t do your job your client will be stuck with a bad deal and the courts will not strike down an agreement just because the deal, well, sucks. But the courts will uphold a lawsuit against you if you failed to meet your professional duty to provide competent advice.
How can you avoid a lawsuit? You’ll have to flip through the 100-page lease and have a strong understanding of every clause. The problem is that you don’t have the time and getting a lawyer involved is very expensive. Yet, you also can’t afford to not know the legal dangers lurking to destroy your deal, client and reputation. The solution? Educate yourself and read on to learn about one of the most common mistakes arising out of lease deals.
Why you have to care (and know!) about more than per square foot rate
The scenario: Your client is an experienced restaurateur and needs a space that’s at least 3,000 sq. ft. in a trendy Vancouver neighbourhood. The square footage is critical because anything smaller won’t fit the number of seats required for the restaurant to turn a profit. Losing even one table would destroy his business.
After months of searching and several deals falling through, you finally find the perfect location at a below market rate. The suite is in a busy strip mall with a gorgeous green space attached and a large parking area. As you review the Offer to Lease you know that your client will be pleased because the offer clearly states that the rentable area is approximately 3,020 sq. ft.
A month later, your client calls. He tells you that his contractor measured the suite and the space is actually 2,500 sq. ft. – he won’t be able to make his business work. He says you and the landlord intentionally misrepresented the size of the unit and he wants out of the deal. If not, he’ll sue.
Is the square footage discrepancy between what your client measured versus what is written in the lease and what he’s paying rent on legal? You bet. May your client try and sue you? You bet.
What happened?
Your client assumed that the rentable area was the actual size of the unit and you didn’t explain the difference between rentable and useable area.
What is the difference and why does the landlord do this?
Before signing an offer, always warn clients that there can be a big difference between the useable area and the rentable area. Understanding and telling your client about these differences is imperative because rental rates are almost always based on the basis of rentable area. I’ve seen many disgruntled tenants start lawsuits over failing to appreciate this difference and businesses fail because of the unexpected cost of rent.
Generally, usable area is the space that a tenant can actually occupy and use, while rentable area includes a tenant’s share of space in the building deemed beneficial to the tenant. The tenant doesn’t necessarily have exclusive possession of such space.
Here’s the clause:
“Rentable Area of the Premises means the area expressed in square feet…. as certified by the Architect or Land Surveyor of all floors of the Premises (including, without limitation, any Mezzanine Area, Basement Areas and Storage Areas), measured from: (a) the exterior face of all exterior walls, doors and windows…. The Rentable Area of the Premises includes all interior space, whether or not occupied by any projections, structures, stairs, elevators, escalators, shafts or other floor openings or columns, structural or non-structural and …. the area of such recess or entrance for all purpose lies within and forms part of the Rentable Area of the Premises.”
This clause essentially means that the rentable area, unlike the useable area, includes the tenant’s share of the building’s common spaces such as lobbies and other non-rentable space such as elevators, mechanical rooms and shared or public bathrooms. The measurements include spaces that no one can physically occupy, such as columns and rooms filled with laundry machines, boilers and HVAC systems.
Why does the landlord make this distinction between rentable and useable area? Because it costs money to run the entire facility, which is open for the tenant’s use and benefit. As such, the landlord will want to recoup these costs and, sometimes, even make a profit for running the building.
What should you do?
What distinguishes good agents from great agents is that good agents negotiate favourable rental rates. Great agents, in comparison, not only know how to negotiate favourable rental rates, but they also know how to protect their client.
The first method to protect your client and yourself from professional negligence claims is to advise your client to hire an architect to measure the space. The hired professional should not only measure it, but also help your client determine if his space needs are met. Be sure that the architect or professional has the proper accreditation to provide a Letter of Area Certification and uses a generally accepted measurement standard such as that adopted by Building Owners and Managers Association (BOMA). Although the BOMA standard isn’t required by law, it is very well-recognized and will enhance the legitimacy of your position during negotiations or if your client has a dispute with the landlord.
The second protective measure is to figure out if the landlord has added a “loss factor” to the rentable area calculation. Although not contained in our clause example above, landlords may also add an arbitrary “loss factor” that is used to “gross up” the rentable area’s size. A “loss factor” is perfectly legal as there is no measurement standard required by law.
Protect yourself by reading the measurement or rentable area clauses carefully. Not the best with reading legal text? Strike out any language that gives the landlord “absolute” or “sole discretion” in calculating the area. Another tool to detect the “loss factor” is to compare your measurement professional’s results with your landlord’s. Also, be sure to add in a sentence requiring that the landlord use generally accepted measurement standards, such as the BOMA standard, and expressly prohibit that the landlord add any “loss factor”.
The final protective measure is to walk through the entire premises. As outlined above, the rentable area also includes columns. By doing a walk-through, you may find that there are numerous columns within the premises that are not available for use. If that’s the case, ask the landlord to reduce the rentable area calculation by excluding a few of the columns.
The best defence against lawsuits, damaged reputations and failed deals is planning and information. With your own facts you’ll have a more informed basis for negotiation and you’ll protect your client from any business-destroying surprises.
This article offers general comments on legal issues and developments of concern to business organizations and individuals and is not intended to provide legal opinions. Readers should seek professional legal advice on the particular issues that concern.
Natalka Falcomer is a lawyer, real estate broker and Certified Leasing Officer who started her real estate career in private equity. She created, hosted and co-produced a popular legal call-in show on Rogers TV and founded and recently sold Groundworks, a firm specializing in commercial leasing law. She is currently the Chief Real Estate Officer of Houseful.ca, leading the development and expansion of the company’s personalized home buying and selling experience for the Canadian market. She sits as an advisor on NAR REACH Canada and is the former multi-year board member of the Ontario Trillium Foundation.
