Following on from my most recent blog published on June 26th, here is a second real-life story where a lease audit revealed a substantial extra-billing of rent following the use of erroneous measurement data by a lessor.

Case #2 – A very lucrative measurement for the tenant.

The tenant occupies approximately 90% of an office building of over 200,000 square feet in Montreal. The 20-year old lease has been amended extensively to reflect the addition of spaces over the years. Some of these amendments mentioned the areas and / or the % of proportionate share so added, others not. The lease provided a specific rent billing rate for office space and a much lower rate for storage space.

Suspicions soon became apparent that something was wrong with the rental areas of the leased premises and the total leasable area of the building (TLAB). Here’s why:

1. Using a simple rule of three from the proportionate share shown on some amendments, TLAB varied from one amendment to another;

2. The lessor had never produced measurement certificates for the added spaces. Only original spaces were supported by certificates. Using the certificates’ data and the % share stipulated in the original lease, the initial TLAB was greater than those obtained under the rules of three of the amendments;

3. The website of the lessor was showing a TLAB different from the one used for the calculation of the annual proportionate share of the tenant;

4. According to internal memoranda traced in the lessee’s archives, the areas of the leased premises (offices and storage) seemed different from those provided for in the lease and the amendments at a specific date years before. Some of the authors of these memoranda were still active employees and were interviewed to better understand the nature of the facts alleged in these memoranda;

5. Some property tax adjustments recoverable from tenants had been made over the years by the landlord and the areas used for these calculations varied from one year to the other;

6. As a result of the transfer of ownership of the property during the term of the lease, the tenant had signed an estoppel certificate in favor of the purchaser. The data on the certificate showed differences in the areas occupied by the tenant;

7. During a visit of the building, I inspected the original premises which had been the subject of a certificate of measurement and these seemed much smaller than the data of the certificate. In addition, the storage spaces seemed much larger than those declared in the lease. It should be remembered that the cost of storage rent per sq.ft. was much lower than the rent of office space;

8. The lessor refused to produce any certificate of measurement, claiming not to have it in his possession.

A very wise recommendation

Given all of the above and the fact that the client occupied approximately 90% of the premises in the building, my recommendation the client was to hire an architect firm to perform the full measurement of the building according to the method of measurement provided for in the lease. A budget of approximately $ 10,000 was required for the measurement mandate.

The tenant followed my recommendation, which turned out to be a very rewarding exercise. Indeed, the certificate highlighted the following points:

1. The categorization of certain spaces between “storage” and “office” was off by 5,000 sq. ft. to the detriment of the tenant;

2. The total actual leasable area of the leased premises was 7,087 sq. ft. less than the areas indicated in the lease and amendments;

3. The actual TLAB was 4,515 sq.ft. lower than that used by the lessor;

4. The net result on the tenant’s proportionate share showed an overstatement of it by the lessor of 1.46%.

The execution of the measurement mandate by the tenant increased the claim presented to the lessor by $ 935,000. One of the most lucrative $ 10,000 investment in history…

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