Square Footage in Commercial Leases

Entering into a commercial lease is a complex undertaking that can be fraught with danger without the right attorney advising you. Every section, paragraph, sentence, and word has legal implications.

For example, one issue that may seem clear is merely stating the square footage to be leased. However, we recently assisted a client who wanted to lease land, upon which a building was to be constructed after the lease execution. The landlord typically reserves the right to verify the floor area by measuring the premises after being built. The landlord’s architect usually does the measurement. The architect then typically certifies to both the landlord and tenant that the measurements are accurate. This measurement becomes the floor area for all purposes under the lease. In many leases, the tenant’s architect will have the right to verify the measurement. Suppose the tenant’s architect disagrees with the landlord’s architect about the size of the premises. In that case, the lease typically will provide a method to resolve the disagreement. However, bear in mind what the dispute resolution will cost, whether that method is arbitration or selecting a third independent architect.

As you can see, verifying the floor area can be a double-edged sword if the lease has already been signed. For example, all of the lease’s economic terms may be revised based on the revised floor area. If the square footage goes down, the rent and the tenant’s share of additional rent will go down. But the tenant improvement allowance would be reduced as well. On the other hand, if the square footage increases, the improvement allowance should be increased along with the rent. To control risk and allow for planning, the landlord and tenant will often negotiate limits on the amount that the square footage may be adjusted up or down due to a remeasurement.

In some negotiations, the landlord and the tenant agree on the square footage at the letter of intent stage. They agree that the rent and tenant improvement allowance (if any) will be based on the agreed-on floor area. This remains true even if it is later determined that the premises’ actual square footage is different from that in the letter of intent. This approach gives the benefit of certainty in budgeting, planning, construction, and lender approval.

Finally, the parties may agree to fix the rent and improvement allowance at the levels stated in the letter of intent. But base the tenant’s share of “triple net charges” on the premises’ square footage, as confirmed by the landlord’s architect.

As you can see, even merely stating the square footage in a commercial lease has legal consequences. Contacting an experienced lawyer can help give you the guidance you need to ensure you know what you’re getting into. We look forward to working with you.