Estimates, Even in Non-Binding Letters of Intent, Can Have Unintended Consequences*
February 15, 2014
Landlords are often persuaded to add, to their letters of intent, estimates with numeric figures (as distinguished from just verbal descriptions) as to the size of the premises, CAM, CAM ratios, fund contributions, construction completion dates, the costs of the contemplated tenant improvements, etc. Landlords are often willing to provide such figures because (a) those amounts are clearly labeled as being only “estimates”; (b) the letter of intent usually states that it is not binding; and (c) any resulting lease would almost certainly contain an integration clause (i.e. a clause purporting to negate any such estimates as are not specifically repeated in that lease) and, probably, a no-reliance clause (i.e. a clause to the effect that the tenant is relying upon its own investigation, not upon any representation or warranty not specifically set forth in the lease).
However, in the recent case of Thrifty Payless, Inc. v. The Americana at Brand, LLC (1), the Court allowed a tenant to sue the landlord – for fraud, negligent misrepresentation, mutual mistake, and reformation and rescission – in such a case. (2)
In Thrifty Payless, it turned out that (a) the sum of the charges for real estate taxes, insurance premiums, and CAM, together, totaled more than double the estimated amount set forth in the letter of intent; and (b) the tenant’s pro-rata share was more than 2.5 times the estimated amount set forth in the letter of intent. To prove its claims, the tenant wanted to present evidence that, among other things (a) the landlord treated some other prospective tenants and
Another tenant differently (despite the fact that, with respect to that other tenant, the language of the lease expressly authorized the landlord to do so); and (b) at the time the letter of intent was entered into, the landlord had superior knowledge of what the actual amounts were likely to be, and (for some reason despite its apparent sophistication) the tenant “was not in a position to discover for itself a close approximation” thereof. Among other things, the Court noted that “the huge disparity between the estimates and the ultimate costs supports an inference of misrepresentation”. The Court held that, despite the word “estimates” and the integration and non-reliance clauses of the lease, the tenant may (a) bring suit for fraud, misrepresentation, and mistake; and (b) present evidence, outside the language of the lease, to prove its claims in such suits. (3)
Drafting lessons from this case: If a landlord is willing to give estimated figures to a prospective tenant in a letter of intent, the landlord cannot rely solely upon protective language in the letter of intent or the lease. In order to try to protect itself, the landlord should (a) calculate those figures very carefully, including taking into account the terms it is offering other tenants; and (b) describe, in detail, in a “catch-all” clause in the lease, the unknowns, the variables, and the flexibilities it reserves, and state that they could result in figures higher than any previous estimates.
* This is an article in the series “Does a Lease Mean What It Says?”
(1) Thrifty Payless, Inc. v. The Americana at Brand, LLC, 218 Cal. App. 4th 1230, 160 Cal. Rptr. 3d 718, 2013 Cal. App. LEXIS 650, 2013 WL 4162243 (Cal. App. 2nd Dist., Div. One, 2013), appeal denied 2013 Cal. LEXIS 8659 (2013)
(2) It should be noted, however, that, in Thrifty Payless, the Court did not state whether the subject letter of intent contained the usual statement that it is not binding. However, the Court’s decision does not appear to depend upon whether or not the subject letter of intent did contain such a statement.
(3) It should also be noted that all the tenant won, at this stage of the litigation, was the right to proceed with its law suit. It is up to the trier of facts to determine whether the tenant proves the landlord’s knowledge of falsity or lack of reasonable grounds for believing its statements were true, the tenant’s justifiable reliance, and the other elements of the tenant’s causes of action.