Tenant's Fraud Suit Against Landlord Based On Letter Of Intent To Proceed

Introduction

Applicable California law provides that an integrated written lease may not be varied by extrinsic evidence to alter or add to the terms of the writing.1 An established exception to the rule allows a party to present extrinsic evidence to show that the lease was procured by fraud.2 Landlords must be wary of assertions made in the course of prelease negotiations following the recent California Court of Appeal decision in Thrifty Payless, Inc v The Americana at Brand, LLC. The court held that letters of intent and estimates of certain charges provided by a property owner prior to lease execution may serve as the basis for allegations of fraud by the tenant.3

Letters of intent and lease

In Thrifty, the landlord and tenant entered into lease negotiations and exchanged draft letters of intent in 2004. The landlord provided the tenant with estimates of what the tenant would pay annually per square foot for common area maintenance fees, real property taxes and insurance (collectively, the 'triple-net charges'). The parties executed a written lease in 2005. Although the lease did not contain specific amount or percentage for the triple-net charges payable by the tenant, it did specify that the tenant would pay its pro rata share of the triple-net charges based on the square footage of the leased premises and the gross leasable area of the retail portion of the development. The lease also contained generally customary integration language (eg, "the lease represents the entire agreement of the parties notwithstanding prior negotiations or discussions").

Trial

In 2009 the landlord billed the tenant for triple-net charges in amount substantially higher than the estimates provided prior to execution of the lease (common area maintenance fees billed were 386% of the estimate, real property taxes billed were 233% of the estimate and insurance billed was 194% of the estimate). The tenant sued the landlord under various theories to recover money damages, as well as for reformation and/or rescission of the lease. The landlord moved to dismiss the complaint, on the basis that the allegations of the complaint did not support the relief requested, and the trial court granted the landlord's motion. On appeal, the appellate court reversed, effectively allowing the tenant's case against the landlord to proceed in the trial court.

Appeal

The appellate court reasoned that the tenant could proceed on the fraud and negligent misrepresentation claims...