Measuring Commercial Premises #441
A recent case confirms that when listing a commercial property, a licensee should break down the rentable area of each floor.1
The property was a building in Kamloops consisting of a main floor and mezzanine.2 On April 16, 2004 the licensee's brokerage listed the property for sale. The buyer was a corporation in the business of purchasing and leasing commercial properties. The licensee acted as dual agent, representing both seller and buyer.
When the President of the corporation asked about the square footage of the main floor, the licensee said it was 20,000 square feet. The President understood that figure to refer only to the main floor, and not to include the mezzanine and storage areas.
During negotiations, the licensee gave the President an excerpt from a recent appraisal which indicated the building area was approximately 19,543 square feet.
On approximately April 21, the parties entered a Contract of Purchase and Sale for the property for $1.1 million in which the premises were described as having approximately 19,544 square feet of rental space. The deal was subject to the buyer completing a feasibility study.
Before removing subjects, the buyer received the complete construction plans for the building and a building inspection report stating the building was approximately 20,000 square feet, with 16,000 square feet of production floor and 3,000 square feet of office space.
Meanwhile, the buyer found a tenant for the space and, apparently relying on the licensee's earlier remarks, told the tenant there were 20,000 square feet on the main floor. On June 8, subject to completing the purchase, the buyer entered an agreement to lease to a tenant who understood that the building contained 19,543 square feet on one level.
The sale completed on July 16 and the licensee ultimately received $38,500 in commission. The evidence revealed that as of September 2004, the fair market value of the building was $1.4 million.
When the tenant moved into the building, the tenant discovered that the main floor was only about 17,400 square feet. The buyer, as landlord, agreed to renegotiate the lease and, in the end, spent roughly $216,924 to build the tenant an addition.
The buyer sued the seller, the listing brokerage and its licensee, claiming approximately $307,914 in damages, being the present value of lost revenue over the 20-year term of the lease to the tenant. The lost revenue flowed from the difference between the property's actual rentable area versus the rentable area promised during negotiations, plus the cost of the addition to the building.
The seller claimed the REALTOR® negligently misrepresented the rentable area and failed to determine the building's rentable area. The court dismissed the negligent misrepresentation claim. Despite the licensee's negligent remarks, the buyer's President could not reasonably rely on them in the face of the building plans, the appraisal and the inspection report, all of which indicated the main floor did not contain all the rentable area. On the other hand, the court allowed the negligence claim, saying:3
|I find that (the listing licensee) was negligent in this matter. I accept the evidence that a realtor has an obligation to determine the rentable area of the building and to so inform the purchaser. (The listing licensee) should have broken down the rental space of every floor and recognized that it is not acceptable practice to inform the purchaser of the total rentable area if the total rentable area is made up of a floor and mezzanine.|
That negligence claim failed, however, for lack of damages. The buyer's reliance on the licensee's remarks did not cause a loss because it bought a building worth far more than the purchase price.
The court did award $1,000 in nominal damages against the licensee and his brokerage for breach of his agency contract. As the buyer's agent, he failed to ensure the completeness and accuracy of his information.
The Real Estate Council stresses caution and consistency when measuring any property. In a commercial property, the Council recommends that a licensee use the Standard Method of Floor Measurement for Office Buildings used by members of the Building Owners and Managers Association of British Columbia (BOMA BC).4
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