By Morgan A. Stewart, Manly and Stewart
Whether through a lease or sale, nearly every multifamily project is marketed utilizing square footage as one of the enticing factors to potential buyers or renters. The push to maximize square footage has always been present, but only recently have savvy plaintiffs’ attorneys seen a way to capitalize on square footage as a way to profit.
The slightest discrepancy in actual versus represented square footage can have devastating consequences when it leads to litigation. Recent trends in litigation have shown that square footage misrepresentation claims are gaining traction due to lawsuits filed by condo buyers in major urban centers around the United States—ranging from New York City to Los Angeles. The effects of such litigation can be devastating to the owners, developers, architects, condominium converters, property managers and brokers involved in these projects, since not only do claims include the substantial costs to litigate, but also carry negative publicity.
By way of example, a New York City condo buyer recently sued both the developer and the architect of an adaptive reuse project, claiming that the square footage of the pre-construction condo unit purchased had been fraudulently misrepresented. While the architect was dismissed, litigation against the developer proceeded until the case was eventually settled out of court. In addition to the monetary damages incurred by the developer as a result of the settlement, the company also had to endure negative media coverage surrounding the case, resulting from the plaintiff’s decision to speak to the press about the legal proceedings.
While the above case is illustrative of a single plaintiff suing on a single unit, the issue becomes significantly magnified when the claim is brought either as a multiple plaintiff or on a class action basis. This is exemplified by a case in Los Angeles that occurred in 2006, when multiple buyers banded together to pursue legal action against the developer and other parties involved with an adaptive reuse project that transformed dormant office space into luxury condo homes. The main claim centered on a discrepancy between the stated square footage and actual square footage of the condos, with the case pursued for a year until a settlement was reached in 2007.
The risks are not limited solely to condominium projects either, since apartment units are marketed to include representations of square footage as to the various types of units. Thus, an apartment renter who claims to have reasonably relied on square footage as part of their rental of a given unit has the potential to file a claim, claiming they were misled if their apartment unit does not actually measure up to the represented square footage. Once again, one plaintiff can be harmful, but hundreds of apartment renters making the same claim can be devastating.
Since most condominiums or for-rent apartment complexes have four of five basic unit types, the inherent risks can be typified by the following example. If condos in a 100-unit complex have all been marketed as measuring 2,000 square feet but are found in actuality to measure 1,950 square feet, the developer may be held liable for reimbursing the buyers for this missing square footage that they in essence paid for, but did not receive.
If the condos are selling for $500 per square foot, and a class action suit is filed that involves all 100 units, that figure will most likely be calculated as $2.5 million. This does not include the attorneys’ fees, litigation costs and negative publicity that follow such a lawsuit. Also, potentially more disconcerting is that such a claim would most likely not be insurable since it is a claim based in fraud or misrepresentation.
The question that more prevalently arises is whether there is an acceptable discrepancy between represented and actual square footage, and if so, what is that measurement? And secondly, how can the parties to these transactions protect themselves?
The foregoing example of a relatively minor 50 square feet nets out a potential liability of $2.5 million. What if the discrepancy were 10 feet or 100 feet? The liability answer for these may depend on the jurisdiction in which your property is located, as well as case decisions. The universal theme appears to be that the parties proceed at their own peril, since there are minimal to no laws available to those in the multifamily business that provide guidance on how to proceed. While there are standards available for measurement, even those standards are open to interpretation, and they are not laws unless adopted by a court or governing body.
Whether building ground up, converting or providing for rent product, the best defense is a well planned offense. Thus, in the case of a developer building a ground-up product that includes units that will be sold prior to completion, early discussions need to be had with the party doing the design as to the measurement of square footage and how it will be determined and by what standard. Prior to signing contracts with design professionals, contractors, subcontractors, risk shifting mechanisms, including indemnity agreements, should be put in place that account for the potential risk of square footage variances.
Before marketing for rent or sale, appropriate language must be considered that includes notations of approximations and limitations. Those same waivers, approximations and disclosures must further be included in sale documents and all related documents, including Conditions, Covenants and Restrictions. The same due diligence holds true for those converting existing product, but due care must be taken in the standards of measurement for that existing product, and that care may include the retention of appraisers.
Such cases involving the misrepresentation of square footage are bound to become more prevalent as buyers
gain awareness about the issues surrounding measurements in the multifamily
industry. And though these cases are centered on condos at present, the potential for lawsuits involving apartment units
is likely to materialize so long as apartments are marketed including square footage representations.
When it comes to square footage, it is best to tread carefully and protect your most valuable asset. After all, one seemingly trivial misstep involving measurements could turn into one very significant—and costly—mistake.
Morgan Stewart is a partner with Manly and Stewart—an Irvine, Calif.-based law firm that specializes in real estate. He devotes his practice to advising national multifamily and commercial real estate clients on legal issues including construction litigation, insurance bad faith, general corporate formation issues, contract negotiation and development, and personal injury.