Owner Liable for Misrepresenting Square Footage to Tenant

March 18, 2009
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A recent California Court of Appeal decision held that an owner could be liable for misrepresenting the square footage of premises and confirmed that although the lease stated that the parties agreed to accept the specified square footage as accurate and did not contain any audit provisions, the tenant had certain rights to review common area expense information.

In McClain v. OctagonPlaza, LLC (2008), a tenant entered into a lease that made the tenant responsible for its share of the overall operating expenses of the building. The lease listed the square footage, but said that the numbers were just “an approximation which the parties agree is reasonable and any payments based thereon are not subject to revision whether or not the actual size is more or less.” Another provision in the lease stated that the tenant “has made such investigations as it deems necessary.”

The tenant suspected that her square footage had been overstated in the lease and that the building’s square footage was understated. She sued the owner for misrepresenting the square footage figures. The evidence presented showed that the owner’s representations of square footage were inaccurate (the tenant’s premises actual size was overstated by 7.6 percent; the building’s actual size understated by 8.1 percent), resulting in an increase in rental payments incurred by tenant’s retail business by more than $90,000 over the term of the lease.

Also, the owner was found to have assured the tenant of the accuracy of the representations and dissuaded her from taking her own measurements. Despite this, the trial court dismissed the lawsuit based upon the lease language absolving the owner of responsibility for misstating the square footage. The tenant appealed.

Relying on California state case law, the appellate court noted that the owner could not escape liability for intentional misrepresentation simply by inserting language into a lease stating that a misrepresentation was reasonable, because such contracts are against the policy of law. The appellate court said that, to the extent the lease provision purported to insulate the owner from liability for any discrepancy between the actual square footage and that agreed upon in the lease, it was akin to an “as is” clause.

Such clauses, the court stated, are “routinely rejected as ineffective in insulating a party from fraud claims regarding non-obvious defects in goods.” The appellate court reversed and ruled that the lease provisions were an attempt to shield the owner from liability for fraud.

The overall message in McClain is that disclaimers or provisions contained in that lease will not insulate an owner from liability for fraud or prevent the tenant from demonstrating justified reliance on those representations. To protect yourself, take steps to ensure that square footage measurements inserted into your lease are accurate estimates of the actual square footage in both the leased premises and the building.