Size Matters!

The single-most important factor in determining how much rent a tenant has to pay is the size of the rentable area being leased.  Yet, at the same time, one of the most confusing topics in commercial real estate is how to determine that size.  That’s because measurement standards vary from market to market and most leases don’t define a measurement standard or refer to the calculations used.

Compounding this problem is that in their leases, most landlords allude to rentable and/or usable footage in “approximate” terms to cover themselves in the event of measuring errors or in anticipation of a desire to later remeasure the premises.

Understanding how measurement standards factor into the determination of rent before signing a lease is critical for tenants to properly control their occupancy costs.  Let’s look at two common situations.

Rent Is Based on Rentable Area, Not Usable Area

Rents are quoted in the marketplace as a cost per “rentable area” (e.g., “$30/square foot”).  However, you cannot use all of the rentable area.  You can only use the area that is inside your walls, or the “usable area.”  Rentable area includes a share of the building common areas.

How the usable space is measured and how the building common areas are allocated to each tenant’s space varies across the country.  The main standards are those adopted by the Building Owners and Management Association (BOMA), the Real Estate Board of New York (REBNY), the Greater Washington Commercial Association of Realtors (GWCAR), the International Facilities Management Association (IFMA) and the American Institute of Architects (AIA).  These standards differ in how they measure interior usable area (to the wall vs. to the glass, to the inner vs. outer glass, etc.), and what they add to the usable area to arrive at rentable area.  They vary as to how they deal with vertical penetrations such as stairwells and elevator shafts, as well as how multi-tenant floors having common hallways and restrooms are measured in comparison to single-tenant floors where these areas are interior to the tenant’s space.

In addition, these measurement standards tend to change over time.  The BOMA measurement standard, for example, has undergone a variety of changes over the past 20 years, primarily around how to allocate common areas that are on a single floor (such as a building lobby) to the tenants of other floors.

Leases Do Not Link Rent to Size

The most common misconception in leasing is that the rent is always linked to the exact size of the space, and that if the size of the space turns out to be smaller than anticipated, the rent will be adjusted.  Although rents are usually quoted on a square foot basis, in many transactions, once the deal is memorialized into a lease document, this concept disappears.  The leases simply set the rent at an overall sum for the block of space being let.  Those obligations will read, “Tenant agrees to pay Landlord the sum of $X in equal monthly installments.”

Elsewhere, the lease will describe the physical space.  But when doing so, the lease will include language that removes the tenant’s ability to challenge its size.  For example, in many cases the lease will create a level of ambiguity by referring to the size of the space as approximate, stating, “Tenant agrees to lease approximately X square feet.”   Also, when referring to the space, the lease will typically read, “Tenant agrees to lease the space designated in the cross-hatched section of Exhibit A” with Exhibit A constituting nothing more than a general floor plan that identifies where the space is on the floor.  In some leases, Landlords try to make size unchallengeable by inserting clauses such as, “The rentable square footage of the premises is deemed to be X square feet and Landlord and Tenant stipulate and agree that the rentable square footage is correct.”

By rendering the size of the premises unchallengeable, and by having the rent set at a fixed amount for the block of space being leased, the landlord shields itself from claims that the rent must be adjusted if the space is smaller than anticipated.

How Do I Protect Myself in My Lease?

There are several things a tenant should do to protect itself in its lease:

  1. Know what you are getting.  Before agreeing to lease space, retain a professional architect or space planner to measure it.  It is an investment worth its weight in gold.  A 3% overstatement of space in a 5-year, 10,000 square foot lease at $30 per square foot will cost the tenant $45,000.  Get an accurate usable area either by having it measured physically or having the plans provided by the landlord measured.  If provided by the landlord, get a certification that the measurements are accurate.
  2. Get a representation as to how the rentable area was determined.  Unlike usable area, this requires measurements of the rest of the building, which can be more problematic.  However, as with usable area, get a certification.
  3. Link rent and size.  Include a provision in your lease that says that you have the right to remeasure, and that the rent will be adjusted to the extent necessary to reflect the new rentable area.

Sample Space Measurement Clause

Here is a suggested clause for tenants to use to remove ambiguities regarding the size of the premises:

For purposes of this Lease, the Premises and the Building shall be measured in accordance with the Building Owners and Management Association (BOMA) Method, American National Standard (ANSI/BOMA Z65.1 – 2010). All references to rentable area and usable area as used in this Lease shall refer to rentable and usable area calculations derived by the application of BOMA.

Landlord shall provide to Tenant, at Landlord’s sole cost and expense (1) a survey performed by an architect or by a licensed or registered surveyor, certifying the rentable and usable area of the Premises and the rentable area of the Building (the “Survey”), which Survey/Certification shall be received by Tenant prior to Tenant’s first monthly rental payment under this Lease, (2) final as-built plans of the Premises, which shall indicate the rentable and usable area of the Premises and shall indicate how the rentable area was calculated, and (3) calculations, certified by Landlord as correct, of the total Building area and of how Tenant’s Proportionate Share was calculated.

Upon request, at any time during the Lease Term, Tenant or its authorized representatives shall have the right to access and review the final as-built plans for the Building. Tenant may, at any time during the Lease Term and at Tenant’s sole cost and expense, retain a licensed or registered surveyor to measure the rentable and usable area of the Premises and the rentable area of the Building, either directly or from the plans provided by Landlord. If such measurement yields a material [parties should agree to this] difference in either the net rentable area of the Premises or the Tenant’s Proportionate Share, the Base Rent and Tenant’s Proportionate Share shall be equitably adjusted on a retroactive basis.

NOTE: This clause is not intended to provide legal advice, and parties are urged to consult with their respective legal counsel prior to using it.