Suggested Tenant Revisions to the "air" Standard Industrial/commercial Multi-tenant Lease — Net

• Jurisdiction: California,United States
• Author: Clint Wilson and Kent Burton
• Publication year: 2015
• Citation: Vol. 33 No. 4

Suggested Tenant Revisions to the "AIR" Standard Industrial/Commercial Multi-Tenant Lease — Net

Clint Wilson and Kent Burton

Clint Wilson

Clint Wilson is a transactional attorney with Baker, Burton & Lundy, PC, in Hermosa Beach, where he focuses on real estate and business transactions. He received his undergraduate degree from St. Mary's College of California, and his J.D. from Loyola Law School.

Kent Burton

Kent Burton, at Baker, Burton & Lundy, PC, devotes his entire legal practice to real estate and business transactional work. With his extensive experience over forty years, Kent represents a wide variety of clients from Fortune 500 to small business owners and individual investors and has negotiated over 100 AIR leases.

I. Introduction

The use of commercial lease forms provided by the American Industrial Real Estate Association ("AIR") is widespread in California's commercial leasing industry.¹Founded in 1960 by brokers for brokers, AIR advances the interests of its membership by providing, in part, standardized lease forms that serve as useful tools which can be tailored to the specific needs of landlords and tenants with minimum cost and time. The cost and time efficiency are appealing to both landlords, who are in the business of leasing space, and tenants, who are generally focused on a much different business. Nevertheless, tenants and landlords often engage real estate attorneys to further tailor the AIR form lease and negotiate certain revisions that address their specific needs and concerns.

This article is written from the tenant's perspective and discusses certain revisions to the AIR form lease that a real estate attorney, who is representing the tenant, can make to protect the client's interest. More specifically, this article suggests tenant-oriented revisions to the current 2015 AIR Standard Industrial/Commercial Multi-Tenant Lease — NET (referred to herein as the "AIR Form Lease" or "Lease"). This particular AIR Form Lease is used for multi-tenant buildings and shopping centers where the tenant pays triple net expenses (i.e., maintenance expenses, insurance, and taxes). While some of the same concepts apply to single-tenant leases, issues specific to single-tenant leases are not reviewed in this article.

From the tenant's perspective, the AIR Form Lease is landlord-oriented, and therefore many of the revisions suggested in this article strive to re-allocate some of the risk to the landlord while others attempt to limit the tenant's long-term monetary exposure. Before proceeding, it is necessary to note that certain provisions suggested in this article are better integrated into an addendum to the AIR Form Lease rather than attempting to insert them into the body of the Lease itself. Incorporating an addendum to an AIR Form Lease that consists of additional provisions is common practice and may be preferred by landlords and their lease administrators. Importantly, the addendum should state that if there is a conflict between the provisions in the addendum and the provisions in the AIR Form Lease, the provisions in the addendum will control. Finally, the provisions addressed in this article are in the same order as they appear in the AIR Form Lease.

II. General Negotiation Issues

A. Square Footage of the Premises

The square footage of the premises is often used to calculate the base rent, and in the case of a triple net

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lease, the tenant's share of common area maintenance and operating ("CAM") expenses.² The landlord will use the square footage of the premises to dictate the base rent (i.e., some amount per square foot), as well as the tenant's share of CAM expenses (i.e., some percentage based on the square footage of the premises compared to the total square footage of all buildings in the shopping center or multi-tenant buildings, both of which are referred to in this article as the "Project").³ Since the square footage is critical in determining the economic terms of the lease, the tenant's counsel should consider including a "right to measure" provision giving the tenant the right to measure the premises after entering into the lease, thereby lessening the risk that the tenant will overpay for rent during its term.⁴

1. How the AIR Form Lease Addresses Erroneous Square Footage

Paragraph 2.1 of the AIR Form Lease states: "the Base Rent stated herein is NOT tied to square footage and is not subject to adjustment should the actual size be determined to be different." Paragraph 2.4(e) further provides: "the square footage of the Premises was not material to Lessee's decision to lease the Premises and pay the Rent stated herein." Accordingly, the AIR Form Lease disclaims the issue of erroneous square footage (e.g., misstated or misrepresented square footage) in favor of the landlord. Given how the issue is addressed in the Lease, the landlord may have little incentive to ensure the accuracy of the square footage, which, if overrepresented, will have long-term monetary implication for the tenant.⁵ To complicate matters, there is no standard method of measuring the square footage of a leased space, and as a result, the square footage as represented may not accurately represent the premises' floor area.⁶ As such, if the square footage of the premises is not accurately represented or the tenant does not perform its due diligence in verifying the actual square footage of the premises before signing the lease (which is not always practical), then the tenant risks overpaying for square footage that does not actually exist.

2. Right to Measure

To protect the tenant from overpaying in rent during the term of the lease, a right to measure provision authorizes the tenant to measure the square footage of the premises after entering into the lease and obtaining possession of the premises (when measuring the premises is more practical for the tenant). Both rent and the tenant's share of CAM expenses should be subject to any adjustment in the square footage of the premises once the tenant has measured the same. In other words, if the tenant measures the premises and the actual size is determined to be smaller, then rent and CAM expenses should be reduced accordingly. To accomplish this objective, the tenant's counsel should: (i) strike the provisions in paragraphs 2.1 and 2.4 that disclaim the tenant's reliance on the square footage represented in the Lease; (ii) place an asterisk near paragraphs 1.5 and 1.6, and note that the base rent and the tenant's share of CAM expenses are subject to change based on the tenant's right to measure; and (iii) insert the right to measure provision in the addendum to the Lease.

3. Drafting the Right to Measure Provision

The right to measure provision should include such terms as: (i) the time period the tenant has to measure the premises (e.g., within thirty to sixty days following the commencement date); (ii) who will measure the premises on the tenant's behalf (e.g., a licensed architect); (iii) the points of measurement to be used (e.g., from the exterior of outside walls to the midpoint of common demising walls); (iv) a mechanism to resolve any dispute between the landlord and the tenant as to the tenant's measurement (e.g., appointment of the landlord's architect, and if still disputed, then a neutral third party architect); (iv) some amount of discrepancy in the stated square footage from the actual square footage that is both acceptable to the tenant and will not change the rental amounts (e.g., one percent); and, (v) a cap on how much the actual square footage can increase the rental amounts (e.g., two percent).

4. Negotiating for the Right to Measure

In negotiating with the landlord's counsel whether to include a right to measure provision, the tenant's position benefits from case law that allows a tenant to sue its landlord for misrepresentation in the event the premises is discovered, after the lease is signed, to be smaller than represented in the lease.⁷ In McClain v. Octagon Plaza, LLC, the tenant signed an AIR Standard Industrial/Commercial Multi-Tenant Lease — Net, which also included AIR Form Lease paragraphs 2.1 and 2.4 disclaiming the tenant's reliance on the square footage represented in the lease.⁸ However, after receiving the landlord's assurance that the stated square footage was accurate and signing the lease, the tenant discovered that the actual premises was smaller than represented such that the tenant was obligated to pay over $90,000 in excess rent and CAM expenses over the term of the lease.⁹ McClain held that the tenant's allegations were sufficient to establish the elements for intentional or negligent misrepresentation, and that the disclaimer language in paragraphs 2.1 and 2.4 did not preclude such claims.¹⁰ In light of McClain, the tenant's counsel can accurately assert that a right to measure

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provision will limit the landlord's exposure to the tenant making a claim over square footage after the lease is signed. As such, the landlord should be agreeable to this provision.

B. CAM Expenses

Pursuant to the AIR Form Lease, the tenant is obligated to pay base rent as well as items of additional rent, including its share of CAM expenses. One of the more favorable provisions for the landlord in the AIR Form Lease is paragraph 4.2. It defines CAM expenses as those expenses incurred by the landlord in the ownership and operation of the project's common use areas and passed through to the tenant. Generally, the tenant is obligated to pay its proportionate share of CAM expenses based on the ratio of leasable square footage in the premises to the total leasable square footage in the Project. While CAM expenses are a staple of multi-tenant triple net leases, a careful review of this paragraph is necessary to ensure that the tenant is paying only its fair share of Project expenses, and that the landlord has not disguised CAM expenses as an additional source of profit. To this end, several changes can be made to paragraph 4.2 to limit the...