Square footage figures have long been considered indispensable when it comes to marketing multifamily units. And cost per square foot is a critical figure that buyers and renters rely upon when shopping for their next condo or apartment.
Yet, though the practice of maximizing square footage is fairly common, there is limited legal guidance that defines acceptable differences between represented and actual size. This leaves many in the multifamily industry vulnerable to the square footage misrepresentation claims that are currently gaining traction in major urban centers around the country.
Astute plaintiffs' attorneys have recently come to realize that even small discrepancies between actual and represented square footage can become a multi-million dollar lawsuit if the claim is brought on behalf of multiple plaintiffs or as a class action.
Since most multifamily projects have four or five basic unit types, the inherent risks can have a multiplier effect. If condos in a 200-unit complex have been marketed as measuring 1,500 square feet, but are found to measure 1,450 square feet, the developer may be held liable for reimbursing the buyers for the missing square footage they 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 200 units, the damages could be calculated as $5 million.
This does not include the attorneys' fees, litigation costs and negative publicity that follow such a lawsuit. Potentially more worrisome is that such a claim would most likely not be insurable since it is a claim based in fraud or misrepresentation.
Measure for Measure
The question at the center of many of these cases is whether or not there is an acceptable gap between represented and actual square footage. Often, different methods of measurements are used to calculate square footage, which is why parties can disagree as to which is the accurate tally. Liability may depend on the jurisdiction in which your property is located, as well as prior case decisions.
In the summer of 2006, a California-based lawyer served as counsel on two class-action lawsuits filed within a few weeks of each other. Both cases centered on alleged square footage misrepresentation at large condo complexes containing dozens of units.
In the first case, the lawyer and his co-counsel filed a suit on behalf of several hundred buyers at a community in San Diego where the units had been converted from apartments to condos. The claim, which accused the developer of fraud, alleged that every one of the complex's 400-plus units was actually smaller than advertised.
In the second case, the same attorney filed suit on behalf of 450 residents in San Francisco. The suit alleged that the square footage was misrepresented in nearly 600 luxury condo units that comprised a two-building complex. Legal action was pursued against multiple parties, including the project's developer, investors and homeowners association, who were accused of fraud and untrue or misleading advertising.
While the forgoing examples are illustrative of class-action lawsuits centered on single condo projects, the damage can be practically catastrophic when the claim encompasses multiple developments.
A class action suit was filed in 2009 on behalf of more than 2,000 buyers in California who purchased condos in any of nine separate projects located in San Diego, Irvine and San Francisco. The complaint alleges that the square footage of the condo units was overstated by as much as 28 percent in some cases. The ongoing litigation involves multiple defendants, including the developer and the real estate brokerage firm that marketed the condo units.
Though these cases are focused on condos at present, there is the possibility that lawsuits involving apartments will also materialize, given that representations of square footage are commonly used to market rental units as well. Thus, renters also have the potential to file lawsuits claiming they were misled if their units don't actually measure up to the represented square footage. And just as condo lawsuits involving multiple plaintiffs can result in dire consequences for the defendants, hundreds of renters making the same claim can also cause devastating effects.
An Inch of Prevention
Precautionary measures may help mitigate the risks, whether building new for-sale product or providing rentals.
In the case of a developer building a ground-up product that includes units to be sold prior to completion, early discussions need to be had with the party doing the design as to measurement of square footage, how it will be determined, and by what standard.
Prior to signing contracts with design professionals, contractors and subcontractors, certain 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 for-sale, appropriate language must be considered and notations of approximations and limitations included. 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.
It is best to proceed with caution—and even err on the side of caution—when calculating and listing square footage. Extra measures taken now can protect you from major legal problems down the road.
About the author
Morgan Stewart is a partner with Manly, Stewart & Finaldi, an Irvine, CA based law firm that specializes in real estate. He devotes his practice to advising national multi-family and commercial real estate clients on legal issues.