Lessons in Commercial Lease Charges: Incorrect Estimates Could Lead to Fraud Claims
by Nicholas Kanter
A recent decision from the California Court of Appeals should give commercial landlords pause before providing estimated common area maintenance charges (CAM) and other lease expenses to prospective tenants.
In Thrifty Payless, Inc. v. The Americana at Brand, LLC, (2013) 2013 WL 3786374, Thrifty and Americana entered into lease negotiations for a space at the Americana Glendale shopping center prior to the development of the center.
A letter of intent (LOI) submitted to Thrifty set forth the annual property taxes at $3.00 per square foot , insurance at $0.80 per square foot and CAM at $14.50 per square foot. The CAM amount, stated as an estimate, was Thrifty’s proportionate share, based upon its square footage, was 2.2 percent of the total CAM. The parties executed a lease.
In 2009, when the first expenses became due, Americana charged Thrifty $169,686 in taxes, instead of the $43,836 that would have been due under the rate specified in the final LOI; $28,110 insurance, instead of the $11,689.60 that would have been due under the rate specified in the final LOI; and $412,307 for CAM, instead of the $211,874 that would have been due under the rate specified in the final LOI.
Thrifty sued Americana for fraud and negligent misrepresentation, claiming, among other things, Americana knew the estimated taxes, insurance and CAM charges, set forth in the LOI, were false at the time they were made, or made without a reasonable basis to believe they were true. Americana demurred to the complaint, arguing an integration clause in the lease, wherein Thrifty agreed it was not relying on statements made by Americana and that Thrifty had performed its own investigation, barred Americana from suing based on estimates in the LOI, which were superseded by the lease.
Citing the recent decision in Riverisland Cold Storage, Inc. v. Fresno-Madera Production Credit Assn., (2013) 55 Cal.4th 1169, 1174-1175, the Court of Appeal ruled Americana could not rely on the integration clause, or the parol evidence rule, to prevent Thrifty from presenting extrinsic evidence to show the lease was procured by fraud.
The court held that under Riverisland, extrinsic evidence (i.e., the LOI and evidence that Americana had told other tenants that their pro rata shares would be substantially higher than the rates Americana represented to Thrifty) is admissible to establish fraud or negligent misrepresentation, despite the lease’s integration clause. The court also noted the large discrepancy between the estimates and ultimate costs supported an inference of misrepresentation.
The Thrifty decision makes clear that landlords cannot rely on exculpatory or integration clauses to avoid liability for misrepresentations, innocent or not, made during lease negotiations.
To protect against such claims, the lease negotiations cannot contradict the lease terms. If estimates are provided without equivocation, a lease provision stating the estimates are only estimates and may vary significantly will likely not protect against a misrepresentation claim. Based on Thrifty, a landlord should anticipate that, despite language to the contrary, evidence of lease negotiations will likely be admissible to prove the landlord made misrepresentations.
Nicholas Kanter is a Commercial Real Estate Litigation attorney. You can reach him via email: firstname.lastname@example.org.