Can commercial tenant sue landlord based on inaccurate pre-lease estimates of shopping center pro-rata costs portion of its rent?

August 28, 2013
By Justice Steven Vartabedian (Ret.) on August 28, 2013 6:00 AM |

landlord.jpgIn Thrifty-Payless, Inc. v. The Americana at Brand, LLC (certified for publication 8/14/13) 2013 DJDAR 10838, plaintiff, doing business as Rite-Aid, leased commercial space at defendant's shopping center in Glendale. Prior to execution of the lease, the parties negotiated through a letter of intent (LOI). In their final LOI, defendants stated that, as a part of the rent, plaintiff would be responsible for its pro-rata share of common area expenses including property tax, insurance and common area maintenance, giving per square foot estimates of what that would be. Plaintiff questioned the amount and it amended the LOI by crossing out the estimate figure and interlineating that the budget would be provided to tenant prior to lease execution. Defendant did produce budget figures and rendered a per square foot amount; it labeled the figures as "purely estimated values." The final lease of the parties provided that plaintiff would pay its pro rata share of such expenses; no details were stated.

After its first full year of occupancy, plaintiff received the bill for its share of these common area expenses. Instead of plaintiff's share being 2.2% of the total as indicated in defendant's estimates, plaintiff ended up being charged about 5.7%, resulting in about $342,700 more than estimated.

Plaintiff then sued defendant on claims of fraud and negligent misrepresentation. It claimed these expenses were material, and that it had relied upon the estimates to evaluate the suitability of the project; that defendant had reason to believe the estimates were false, and plaintiff relied upon defendant's superior knowledge. It alternatively claimed innocent misrepresentation and mutual mistake. Defendant demurred to the complaint alleging plaintiff did its own investigation and was relying on representations not contained in the integrated final lease agreement of the parties; that its estimates were non-actionable opinions and predictions. The trial court sustained the demurrer without leave to amend, finding the figures in question were only estimates.

The Court of Appeal, Second Appellate District, Division One, reversed. The court cited Furla v. Jon Douglas Co. (1998) 65 Cal.App.4th 1069, 1080, as follows: "A statement couched as an opinion, by one having special knowledge of the subject, may be treated as an actionable misstatement of fact." Plaintiff here was not in a position to discover for itself a close approximation of the ultimate common costs. Under the California Supreme Court's opinion in Riverisland Cold Storage, Inc. v. Fresno-Madera Production Credit Union (2013) 55 Cal.4th 1169, extrinsic evidence is admissible to establish fraud or negligent misrepresentation in the face of the lease's integration clause. Plaintiff set forth in its pleadings a sufficient allegation that defendant should have known its estimates were grossly inaccurate. And given the parties' previous dealings, reliance by plaintiff upon the estimates also was adequately pleaded. While pure predictions of what might happen in the future have been found not actionable, the claim here is about existing fact, not an opinion regarding future actions of third parties.

I should not need to remind the reader that plaintiff still needs to prove its case. The appellate court here is just saying that plaintiff should not be precluded from having an opportunity to prove its case as it has stated an actionable case. I do think the confluence of cases, such as this one, tending to broaden what may be considered a material and actionable misrepresented "fact" (even if expressly called a mere estimate or opinion by a defendant) and the heightened admissibility of extrinsic evidence concerning alleged fraud should cause caution to parties who tend to embellish representations made in negotiating contracts, even those with sophisticated parties.

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