To Use or Not to Use the RICS Code of Measuring Practice

Whether you are buying or selling a freehold property off plan or a lease in a yet to be built development, measurement will be an issue that will form part of the negotiations.

Many agreements contain a measuring clause and it has been standard practice to state that measurements should be made at the appropriate time in accordance with the latest RICS Code of Measuring Practice.

CONTRACTUAL OBLIGATIONS

The case of Kilmartin SCI (Hulton House) Limited v Safeway Stores plc [2006] 09 EG 184 illustrates the point quite nicely. In this instance a contractual minimum net internal area had been agreed and building commenced.

During the works Safeway had requested that lifts be provided as part of the build, but no variation to the contract was negotiated to compensate for the reduction in area.

When the premises came to be measured in accordance with the Code the lifts were quite correctly excluded from the area under section 3.14 of the Code and thus the area was reduced.

At stake for Kilmartin SCI (Hulton House) Limited was a premium of £1 million and an annual rent of £600,000. In the end the Judge (Warren J) decided the area did exceed the minimum net internal area agreed in the contract – but only by 3m².

LEGAL COMMUNICATION

When considering a measurement clause it is imperative that you let your lawyer know exactly what you were taking into account when you agreed the area in the first place.

Is it simply the area inside a red line, no matter whether there are lifts, landlord or tenant risers or partitions to be installed as part of the build? Or did you agree the area with reference to net internal area as defined in the Code?

If you actually agreed the former, then it may be better not to refer to the Code at all, or at least to make it clear that you are referring to the gross internal area rather than the net internal area.

If you do agree to refer to the net internal area as defined in the Code it would be advisable to agree to build in a mechanism to vary the agreed minimum net internal area if changes in the design are agreed between the parties after exchange.

You could even agree a schedule of the potential reductions to the minimum net internal area if certain foreseeable variations are incorporated i.e. for lifts, staircases, escalators, tenants' risers or even for a change in the agreed pitch of the roof that would mean parts of the area previously included become unusable and are excluded under the Code.

LANDLORD AND DEVELOPER

So why is this important for a landlord / developer? In the Safeway case, if the resulting measurement had been 3m² less Safeway could have walked away from the build leaving Kilmartin to absorb the build costs, the loss of the £1 million premium and the £600,000 rental income per annum. That is quite a hole in anyone's pocket!

Although the rental income may in the most part have been recovered over time as new tenants replaced Safeway, there would still have been the additional costs of finding that new tenant and maybe the loss of the premium.

By paying more attention prior to exchange to the way you will be measuring at completion you could also avoid the costs of litigation.

TENANT AND PURCHASER

And why should a tenant / purchaser care? Although it could be argued that refusing to negotiate flexibility into the measurement clause leaves the tenant / purchaser open to walk away if the design changes, in the light of this case it is less likely that, if there is no flexibility built into the contract, a landlord would be willing to contemplate varying the design after exchange of contracts.

If, as the works progress, the tenant decides that it now requires, for example, an extra lift it is likely that a landlord would refuse to make provision for this in its construction programme unless the tenant has agreed a flexible measurement clause in the original contract.

FLEXIBILITY

If a tenant or purchaser's needs have changed since exchange of contract, this could mean that they would immediately have to alter the property once it had been handed over (if they are allowed to do so in their lease).

This could be costly to implement after the event and, in the case of commercial premises, prevents the tenant from trading as soon as they had anticipated - meaning they could potentially be paying rent on a property that is not trading and therefore has no income.

Allowing flexibility in the contract means that both parties have more certainty and are able to work together to achieve the best solution for all parties as the build progresses and to accommodate changing requirements.

Additionally, in the case of a landlord developer and tenant, the ability to be flexible prevents the relationship breaking down before the lease has even been completed.