DD 3/31/06 Simple fraud not enough - victim must show reliance.

Daily Development for Friday, March 31, 2006
by: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri
dirt@umkc.edu

LANDLORD/TENANT; COMMERCIAL; COTENANTS; FRAUD:  Commercial tenant's cannot prove reliance on lessor's alleged fraudulent oral representations concerning prospective shopping center cotenants  when lease states that tenant has not relied and tenant fails to inquire further about cotenants during negotiations. 

Hinesley v Oakshade Town Ctr. (2005) 135 CA4th 289, 37 CR3d 364

In 1998, Hinesley signed a five-year commercial lease with Oakshade for retail space in a shopping center. Thereafter, Hinesley sued Oakshade for fraud in the inducement and rescission of the lease.

Hinesley alleged that during the lease negotiations, Petrovich, Oakshade's representative, told Hinesley that Dos Coyotes (a regional restaurant chain), Starbucks, and Baskin-Robbins would be leasing and occupying suites near Hinesley's suite, and that all three would commence operations by the end of 1998.  Hinesley alleged further  that  Petrovich knew that Oakshade did not have a contractual commitment from any of those businesses.

Oakshade moved for summary judgment on the grounds that the alleged statements were nonactionable opinion and the alleged concealment was not material because (1) the lease provided Hinesley was not relying on the existence of other tenants in entering the contract; and because (2) Hinesley never questioned Oakshade about the other tenants. The trial court granted the motion.

The court of appeal affirmed, although it found for the tenant on many of the grounds for summary judgment. 

The court first concluded there was a triable issue of fact as to whether Petrovich's representations were statements of fact or nonactionable opinion. Statements as to future actions by a third party are deemed nonactionable opinions. Hinesley showed that Petrovich's representations contained an implied assertion that Oakshade had already signed leases with Dos Coyotes and Starbucks. That was a false assertion of existing fact, not an opinion regarding future actions of third parties.

Despite this conclusion, the court went on to state that  there was no triable issue of fact as to whether Hinesley justifiably relied on any material representation.

The court again gave the tenant its due.  It conceded that an affirmative misrepresentation or concealment of facts regarding recognized name-brand cotenants would be material, and further that a reasonable trier of fact could infer reliance from such misrepresentations, absent evidence conclusively rebutting reliance.

But the court then concluded that Oakshade presented such conclusive rebuttal evidence.  First there was the disclaimer in the lease.   Paragraph 25.33 of the lease provided in pertinent part:

“Lessee does not rely on the fact nor does Lessor represent that any specific Lessee of [sic] type or number of Lessees shall during the term of this Lease occupy any space in the Shopping Center.”

Notwithstanding this language, the court admitted that, under California law, Oakshade could not contractually insulate itself from its own fraud by this language.  Nevertheless, the language should have conveyed the implication that there was no guarantee that particular businesses would be Hinesley's cotenants and put him on notice to inquire further. It was certainly a factor to consider in determining his justifiable reliance.

Thus, although Hinesley had no independent obligation to question Petrovich or tell him that the status of the other tenants' leases was important to his decision and the timing of his own lease, his failure to do so was persuasive evidence that he was not in fact relying on the presence of these tenants in deciding to execute the lease. In the absence of actions taken to clarify the contractual status of the three cotenants, to notify his attorney of Petrovich's representations as context for review of the lease, or to modify the disclaimer paragraph despite proposing many modifications to other provisions of the lease, Hinesley could not justifiably rely on Petrovich's representations.

Reporter’s Comment:  If you represent small merchants renting spaces in shopping centers, be sure to add to your checklist of matters to discuss the issue of how important the identity of neighbors is to them, and whether the center's rental agent has said anything about that matter. If your tenant client was "lured" into his or her space by false representations about the neighbors, rescission is going to depend not only on whom to believe, but also on getting around lease provisions like Paragraph 25.33 of this document.

On the one hand, it is obvious that a shopping center landlord has to have flexibility about signing up tenants and moving them around, which is what 25.33 seems intended to accomplish. On the other hand, that clause can also have, as this case shows, the strong side effect of demolishing a tenant's claim of reliance on overly rosy representations by the rental agent.

I doubt that many landlords would be willing to guarantee in writing that a Starbucks will move in next door or is certain to stay for the next many years, but that does not prohibit asking for a kind of reverse estoppel certificate regarding the existing lease (and exit) terms of neighbors whose presence really matter to your client.

Editor’s Comment: The editor can’t quibble with the Reporter’s suggestion that the attorney check with the client tenant to be aware of the existence of cotenancy issues.  But small shopping center tenants in fact have very little leverage, and lease transactions can be “overlawyered” to the point that the client develops unreasonable expectations about what the landlord is likely to give. 

The Reporter for this item was Professor Roger Bernhardt of the Golden Gate Law School in San Francisco, writing in the California CEB Real Property Reporter. 

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