Certainty as to area can avoid significant financial implications
Properly worded rental calculation clauses and agreed methods of premises measurement can potentially save tenants significant amounts of money over the term of a lease, as well as being fundamentally important for the landlord to ensure its rental return is correctly based. It is surprising how many leases do not provide for this.
Leases should provide instructions for the assessment of rent during the establishment of initial premises rentals which, consequentially, sets the area basis for, subsequent rent reviews. Failure to have this determined may result in a tenant paying a very significant amount more in rent and operating expenses than they bargained for.
How rentable areas are arrived at and where methods of assessment are recorded
Premises in new buildings are usually based on architectural plans for the development generally. These are indicative of premises size only and the final completed build and premises may be different in size to those architectural plans. Rent is usually calculated on a premises per square meter basis, whereby each square meter of the premises is allocated a price based on the current market rent of that premises. What a landlord should be charging rent and operating expenses for and the tenant paying the same is what is known as the “rentable” area i.e. in simple terms, being areas of the premises that are useable by the tenant for its exclusive use and for the prescribed use in the lease. Based on this principle there are recognised guidelines to determine the exclusive area of the premises but should also identify areas that may be used in common with other tenants and/or areas that are simply not useable by the tenant.
A tenant is only liable to pay a share of those common areas. It is therefore very important that this method of measurement is agreed at the outset. The certification should be not only for the premises (and common areas) but also for the whole building and amenities (such as end of trip facilities) so that there is an accurate basis for determining the proportion of operating expenses attributable to the premises.
What problems this can cause
A) Uncertified premises plans
Vague wording in rental clauses, lack of agreement on a specific calculation method or failure to obtain rental area surveys can lead to misunderstandings and incorrect assumptions from the landlord, the tenant and surveyors. Agreement on a standard method of calculation can prevent any disagreements as to rentable areas and any need for the premises to be resurveyed following disagreement and possibly claims for overpayment of Rent and operating expenses.
An example of the importance of an accurate rental area survey recently saved a client approximately $500,000 over the course of the term of their lease. The landlord was purporting to charge the tenant for common areas that should not have been rentalised exclusively to the tenant. The tenant’s examination of the rental area survey however showed that these common areas were part of the basic amenities of the building itself, servicing all tenants, and therefore should not have been rentalised exclusively to the tenant.
B) Legal advice desirable
Legal advice is important when entering into leases.
For instance, on a new build, the actual rentable area may be significantly different to what was anticipated in the architectural plans. A tenant would usually want to ensure that there was a cap and collar as to the actual measured rentable areas as against the areas estimated in the architectural plans.
A recent example of this is where the tenant entered into an agreement to build and lease which provided that the rent would be calculated on a per square meter basis, but there was no ‘cap and collar’ on the proposed area of the premises. The landlord delivered a premises that was 30% larger than anticipated in the architectural plans, and the tenant was contractually bound to pay 30% more rent and operating expenses, which, given the size of the premises, amounted to more than $100,000 per annum. This could have been avoided if the tenant had obtained good legal advice before signing the agreement to build and lease.
How can we help?
A lease is one of the major cost items in your business and is usually for a long time. It is important for us to discuss your lease terms at an early stage of your negotiations to ensure that matters such as described in this note are addressed.
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