Measure for measure: why floor area matters in commercial property

Introduction

The accuracy and methodology of floor area measurement underpins almost every key commercial property number. 

Whether you are seeking to agree a headline rent, modelling an investment or apportioning service charges, the calculation is usually calculated on a £ per m²/ ft² basis. If the measurement is incorrect (or the parties’ understanding of the basis is inconsistent), there is potential for disputes.

What are the main issues relating to measurement arising out of the sale, letting and management of commercial properties? 

Valuation

An experienced surveyor will have encountered the ridicule of bemused clients during an inspection – "the walls haven’t moved mate!". They are usually right, but these comments overlook the need for comprehensive due diligence.

In theory, agreement of floor areas where the parties have agreed to align with a consistent measurement basis should be a matter of fact. In practice, there is almost always the need for compromise when opposing surveyors seek to agree the facts.

Validation of floor areas for a valuation is essential to enable a reliable, ‘like-for-like’ comparison with market evidence. A breakdown of areas may also be critical to achieve differential rates. Furthermore, notwithstanding the existence of widely adopted guidelines and standards, there remain significant variances in the practical implementation, sometimes as a result of gaps in the guidance itself.

Asset class variances

Industrial and logistics

In the industrial and logistics sector, there is sometimes an inconsistent adoption of RICS Standards when it comes to the distinction between the gross internal (GIA) and gross external (GEA) measurement bases. Many unrepresented occupiers will not appreciate the distinction. However, this can result in distortions that can hit the pocket of either the occupier or the investor. 

The obligation of RICS member firms to clearly state the basis of floor area measurements in marketing literature is not always followed. This disproportionately impacts unrepresented parties, and indicates the need for more proactive enforcement of existing regulations and professional standards.

Offices

The introduction in 2016 of the International Property Measurement Standard 3 (IPMS3) as the default basis of area calculation has not brought about the intended clarity. It was introduced to align measurement practice globally, but uptake has been varied. 

The IPMS3 standard includes measurements into window reveals (where the recess accounts for 50% or more of the dominant wall face), internal columns, and 50% of the thickness of partition walls subdividing lettable accommodation, creating practical difficulties for reliable on-site measurement, as well as a misalignment with the practical considerations of the end user. 

In practice, the adoption of IPMS3 remains incomplete, with many sub-markets continuing to see a high number of schemes marketed, transacted and valued based on the NIA measurement basis. As with the industrial and logistics sector, there exist issues with transparency and consistency in the market.

Retail – high street

Retail is the core commercial sector which experiences the most consistent valuation approach. NIA has remained unchallenged as the dominant measurement basis, and the valuation technique of zoning remains widely adopted in high street settings. 

Zoning seeks to weight the value of the total floor area based on its proximity to the shop frontage. The rationale is that the shop floor closest to the display and customer entrance has the greatest value, with that value diminishing as the store depth increases. 

In practice, this translates to the ground floor sales accommodation being divided into ‘zones’, each measuring a depth of 6.1 metres (20ft). ‘Zone A’ at the front is given 100% value, with the halving back principle seeing subsequent zones valued at 50% of the rate of that zone which preceded it. For example: Zone A (100%), Zone B (50%), Zone C (25%), etc. This allows rental values to be expressed as a relative approach ‘in terms of Zone A’ (ITZA). However, market practice will differ in terms of the treatment to be applied to ancillary areas. These ancillary areas can either be valued through the application of spot rates, or they can be assigned values relative to Zone A. Further care must be taken when determining the zone depth to be adopted, as this can vary in certain geographical locations due to historic custom, as can the number of zones assessed before reverting to a ‘remainder’.

Retail – other premises

Away from the high street, an ‘overall’ approach to valuation is typically taken for out-of-town centres, larger isolated stores, and convenience stores. Here the rent is typically apportioned unadjusted over the totality of the measured NIA. However, in some sub-sectors, most notably convenience stores, there is the sporadic adoption of GIA as a substitute. The valuer plays a key role in distinguishing the variance, the rationale for it, and ensuring a safe ‘like-for-like’ comparison. 

Asset management

Measurement plays a fundamental role in the ongoing management of all assets, and particularly for multiple units with a service charge regime in operation.

It is important for landlords to ensure that the basis of measurement used for calculating the service charge apportionment reflects what has been agreed with incoming occupational tenants for service charge caps.

It is not uncommon to see some property managers working from slightly different measurements for service charge purposes to those set out in heads of terms. This is more frequently seen in office lettings where service charges are based on NIA measurements, while IPMS is more frequently used for valuation purposes. It is preferable to have consistency, but this is not always possible or practical where it has an impact on the other tenants of a development. 

A similar principle applies from a rent review perspective where the parties decide to agree a measurement of the unit for ascertaining the market rent and/or a cap and collar to be agreed at a specific rate per square foot. An unspecified basis of measurement in heads of terms can lead to dispute once this carried into the lease documentation. The method of calculation also should be borne in mind when considering comparables for rent review purposes to ensure that rents are looked at on a like-for-like basis.

Legal transaction documents

There is often interaction between measurement formulae and the legal transaction documents, and a pre-let agreement is a typical example of this. 

The headline rental figure is often calculated by reference to a measurement of the unit, sometimes by the parties or an independent measurement surveyor. It is important that both parties are clear on the basis of the calculation of the rent under the new lease. The measurement can also be used to work out landlord contributions, particularly in the case of offices, for floor boxes and carpeting.

The pre-let agreement may also contain provisions to allow for the tenant to refuse to accept the unit if it falls outside of certain specified parameters, where the unit is a specified percentage smaller (or in some cases larger) than the target measured area. Where a tenant has the right to terminate a pre-let agreement, the landlord must manage the construction phase carefully to avoid losing the occupier on which investment value of the asset depends.

It is therefore essential for all advisers to the parties to understand the requirements of the pre-let agreement. There cannot be discrepancies with the technical documents for the construction of the new unit, and the implications of failing to meet target specification must be fully understood.

Why measurement discipline matters

The measurement of commercial properties, and its application, is central to investment value and occupational costs. 

It is essential to follow a clearly defined methodology which is communicated to all parties and their professional advisers, to avoid delayed transaction negotiations and unexpected consequences further down the line in the calculation of rent reviews and service charge caps.

Experienced and aligned legal and surveying advisers who understand both the importance of accurate measurement and the nuances of adopting different bases of calculation can put commercial property investors and occupiers in the strongest position when managing their portfolios.

We have collaborated with Joseph Walker, a partner at leading full-service commercial property consultancy and chartered surveying firm, Vail Williams for his expert input on this article.