Even an Inch Can Mean a Lot

May 25, 2009
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If you are leasing space from a landlord who uses a standard form contract in which square footage is an “estimation,” it could be costing you extra common area operating expenses. Even a few harmless inches can add up to thousands of dollars over time. That was the basis for an appeal made by a commercial tenant in McClain v. Octagon Plaza, LLC.

In this case, the tenant alleged that the landlord had misrepresented the size of the premises in a shopping center and had charged her an excessive percentage of common area expenses. The landlord used a standard form agreement prepared by the American Industrial Real Estate Association, “Standard Industrial/Commercial Multi-Tenant Lease—Net,” which described the size of the unit leased by McClain for five years two months as “approximately 2,624 square feet.” In addition, the landlord attached a diagram of the shopping center to the lease, which represented the size of the space as that amount.

Under the terms of the lease, the tenant had to pay $3,804 each month in base rent and 23 percent of the common area operating expenses, for which the tenant had to pay its pro rata share based on the landlord’s presentation of a reasonably detailed statement that would be presented to her within 60 days after the end of the calendar year. The case began when, after becoming dissatisfied with her landlord’s alleged misrepresentation of the commercial space she rented, and also for the landlord’s failure to submit a proper accounting of operating expenses she helped to pay, McClain sued him for misrepresentation, i.e., fraud in the inducement, and an accounting.

Prior to signing the lease, McLain attempted to confirm the size of the space, but the landlord told her that measuring the area would be unreasonably costly due to the space’s unusual angles. The landlord insisted that it had intimate knowledge of every detail of the shopping center, and that the tenant could rely on its representations regarding size.

The tenant had obtained a copy of Octagon’s application for earthquake insurance, which showed that the correct size of the shopping center was 12,800 square feet, rather than the 11,835 square feet that the landlord used to calculate McLain’s share of the common expenses. Upon investigation, she also discovered that her unit occupied approximately 2,438 square feet, rather than the 2,624 square feet stated in the lease, which should have made her rent $3,535.10 per month, and her share of common area expenses 19 percent instead of 23 percent. The total of excess rent that she paid came to more than $90,000.

On this issue, an appeals court ruled in McClain’s favor in that she is entitled to an accounting for her share of the operating expenses she had paid, but remanded the matter for further proceedings regarding those claims [Kelly McClain v. Octagon Plaza, LLC, January 2008].