Wednesday, February 8, 2017

PROBLEMS WITH THE DESCRIPTION OF LEASED PREMISES



Lack of care when describing the leased premises in a commercial lease exposes the parties to the risk of litigation.

In one case[1], the parties disputed the square footage of the leased premises, an office, upon which the rent was to be calculated. The landlord insisted that the rent be calculated on the gross leasable area, which means the actual measurement of the premises grossed up by 10-15%, depending upon the category of the building, in order to include a proportionate share of the common area. The tenant only wanted to pay for the usable space in the leased premises.

Around the beginning of 2010, tenant received a marketing flyer from landlord’s broker describing the leased premises having a leasable area/superficie locative of 2700 sq. ft. and a gross rental rate of $16 per sq. ft.

On or about June 3, 2010, tenant submitted a draft promise to lease a total gross area of 2600 sq. ft. (to be re-measured at landlord’s cost) at a gross annual rental of $12 per sq. ft.

On or about June 8, 2010, landlord submitted a counter-offer for a total gross area of 2775 sq. ft. at $13 per sq. ft.

Tenant rejected the counter-offer. After a meeting between the parties on July 16, the broker submitted a new draft promise to lease for a total gross area of 2775 sq. ft., subject to final re-measurement, at $13 per sq. ft.

On July 20, tenant submitted to the broker, a revised promise to lease containing some modifications for a total internal gross area of 2775 sq. ft. subject to final re-measurement, at $13 per sq. ft. Neither the broker nor the landlord’s representative noticed the insertion of the word “internal”, nor was it ever previously discussed by the parties or with the broker.

The tenant had to vacate its old premises by the end of August and needed to take possession of the leased premises without delay in order to carry out leasehold improvements.

Around the end of July, the broker sent tenant the landlord’s standard form lease agreement and followed up with the tenant on August 13 and again on August 30 by which time, the leasehold improvements were well under way and almost completed.

On September 3, tenant sent the broker a revised gross lease agreement for a gross rental area of approximately 2775 sq. ft. to be re-measured from the inside of the partition walls for exactness.
On September 14, tenant informed landlord, for the first time, that it had no obligation to pay any rent for the proportionate share of the common areas, which included the elevator, stairs, corridors and bathroom.

The building in question is a strip mall. The tenants at ground level are retail and each have a private entrance leading directly from the parking lot. They don’t use or benefit from the common areas.The second floor contains offices which use and benefit from the common areas. All other office tenants paid a proportionate share of the common area expenses by calculating the rent on the grossed-up area of their premises.

The previous owner had measured the building according to the BOMA (Building Owners and Managers Association) standard but the area summary was provided to the tenant only after the promise to lease was signed. Since the signed promise to lease did not refer to the BOMA standard, it could be argued that the rent should be calculated on the usable area without any gross up for common areas.

It would have been preferable for the landlord to be explicit in this regard. However, the landlord was saved by the particular facts of this case since the parties had agreed to lease a gross leasable area. It was held that the tenant acted in bad faith by adding the word internal to the description of the leased premises. In fact, neither of the two experts who were engaged by the parties had ever heard of the term, internal gross area, and could not interpret it with any degree of confidence. Considering that the tenant's representative was an experienced real estate lawyer, the court concluded that the insertion of the word internal was an attempt by tenant to avoid paying for common area expenses by causing confusion and dragging the landlord into further discussions.

There are different BOMA standards for retail, office and industrial buildings and the standards get revised from time to time. Ideally (but unfortunately not always), an extract of the specific BOMA standard should be annexed to the lease to avoid any misunderstanding. Moreover, Article 1435 of the Quebec Civil Code states that such an "external clause" is null unless it is incorporated in the contract, when the essential terms of the contract were imposed by one of the parties and are not negotiable.


[1] 9056-3818 Qu├ębec Inc.  vs- 110302 Canada Inc. 2013 QCCS 5543













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