Don’t Believe What I Told You Clauses

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Here’s a story with a few different lessons. One aspect of it won’t be of great utility to our readers, so we’ll get it out of the way right now. The tenant in this story appeared to sign a lease without counsel and without fully reading it. We don’t think that aspect casts any shade on the lessons we’ll be covering, but keep the tenant’s approach in mind as you read the rest of today’s blog posting.

The owner of a successful chain of quick-service, ethnic restaurants developed a new concept – a mall restaurant that would sell gourmet hot dogs. W.C. Fields might have called those “Gourmet Tube Steaks,” but that’s for another industry’s blogs. He honed in on a large mall, one that only had three remaining spaces in what appeared to be its food court (though the court never explicitly identified it as such). One of the existing tenants in that food court was a well-known, national, premium hamburger quick-service restaurant. No, it wasn’t the one with the golden arches. Although that hamburger restaurant sold hot dogs, they were only a sideline. So, this was of no concern to the owner’s gourmet hot dog plans.

He, however, was concerned – very concerned – about possible competition from any other restaurant that relied on the sale of hot dogs as part of its core business. So, over and over, even as he was signing a lease for his new concept restaurant, he asked the mall’s leasing agent whether the mall would be leasing space to anyone whose business would compete with his restaurant concept. She repeatedly said, “No.” When asked about other prospective tenants with whom she was negotiating for the remaining spaces, the leasing agent claimed, falsely, that the mall owner’s policy precluded her divulging that information. Even when the owner told her that he wasn’t interested in their names, only the kind of restaurants those prospective tenants would open, she answered the same way. The landlord had no such non-disclosure policy.

The acts were at variance with the leasing agent’s answers. Not only was she already negotiating a lease with a tenant whose significant menu items included hot dogs, but that lease was signed before the gourmet hot dog tenant signed its own. Readers, remember that immediately before signing its own lease, this unrepresented tenant’s owner actually asked his question about competition and wasn’t told about the incoming competitor. In addition, when the gourmet hot dog tenant’s tenant improvements were about 30% complete, its owner learned of the competing tenant. He asked the mall manager and was assuaged. The work was completed, and the gourmet restaurant opened with long lines out the door. Business increased week after week until the new, competing tenant opened one space away. The new tenant’s menu offered lower-priced hot dogs. Immediately, the gourmet hot dog restaurant’s business fell-off by about 30%. It sued the landlord three months after the competitor opened, and closed three months later.

At this juncture, it would be fair to ask: “Did the leasing agent actually know that the later-open restaurant would be a competitor to the gourmet hot dog restaurant’s business?” You be the judge. The competing restaurant was a national chain. Though its prime offering was roast beef sandwiches, it did feature hot dogs and French fries as well. In fact, when it negotiated for an exclusive use right, it asked protection for “Italian Beef sandwiches, Italian Sausage sandwiches and/or Hot Dog sandwiches.” The leasing agent said such an exclusive use right was impossible to grant because it “would affect” others at the mall. Ultimately, the competing restaurant settled for only the exclusive right to sell “hot beef sandwiches.”

Now, remember that the gourmet hot dog restaurant didn’t sign its lease until after the hot beef restaurant had signed its own lease. So, you would expect that the “hot beef sandwiches” exclusive would have been listed as a prohibited menu item on the gourmet hot dog restaurant’s lease. The mall’s other exclusive use restrictions were listed, as were the names of the other tenants who held each listed right, but not the one held by the competing restaurant.

There was a jury trial. A unanimous 12- member jury found that the landlord had harmed the gourmet hot dog restaurant by intentionally misrepresenting that there wasn’t a competing restaurant in the hopper. Also, by an 11-1 vote, it found that the landlord committed the tort of fraudulent concealment. The jury, however, did not believe the landlord’s conduct “constituted ‘malice, oppression, or fraud’ sufficient to warrant punitive damages.” Based on the landlord’s fraud, it awarded damages to the gourmet restaurant for its lost profits.

Why did we open up by revealing that the restaurant’s owner had not read the lease before signing it? [Actually, he looked at its cover-data sheet to verify that the basic business terms were there, probably looking for the length of the lease’s term, the rent, etc.] That’s because, as our readers might expect, the lease contained a number of provisions which, in essence, said not to believe anything the landlord may have said or done before the lease was executed. Apparently, it wasn’t only the ever-present “merger” or “integration” clause that said that. The court recited that the lease specifically said that the landlord made no promises about the presence or absence of any specific, other tenants. We don’t know exactly what those provisions might have said, though the court gave one example, not one that bowls us over. It pointed to a disclaimer on the site plan, an exhibit that likely showed some tenant’s names connected to certain spaces. That disclaimer included a statement that the site plan was not a representation that the ones named were either current tenants or would-be future tenants.

Other than what we’ve written being an “interesting” story, there are some things we can learn from this restaurant owner’s sad tale of woe. Here’s what we think they are, presented in a mix of story and analysis.

The landlord offered two defenses beyond unsuccessfully arguing that it wasn’t responsible for what its leasing agent and mall manager told the restaurant owner. Of course, it pointed to the “don’t rely on anything that isn’t written into the lease, specifically anything we might have told you during negotiations” clauses. Basically, this type of argument fails when someone, in this case, the landlord, commits fraud. Here, the jury found the landlord’s fraud to be intentional, and the court dismissed the landlord’s argument in this way:

[T]he issue of [restaurant owner’s] failure to read the entire lease is not dispositive, given the ample evidence of fraud. … Even if [he] had read the entire contract, he would not necessarily have been alerted to [the landlord’s] false representations. This case is therefore distinguishable from cases in which oral representations are ‘patently at odds with the express provisions of the written contract,’ rendering reliance on oral statements unreasonable as a matter of law. … As the California Supreme Court has observed: “The best reason for allowing fraud and similar undermining factors to be proven extrinsically is the obvious one: if there was fraud, or a mistake or some form of illegality, it is unlikely that it was bargained over or will be recited in the document.”

Now, fraud isn’t enough to get a defrauded party relief. Just because someone, at a party, falsely tells you that she or he is a multi-billionaire, you haven’t been defrauded unless you did something (to your harm) in reliance on that lie. And, just relying on that statement isn’t enough. Your reliance has to be reasonable. For example, if you paid your neighbor to build a moat around your house because she or he, intentionally and with the intention of defrauding you, told you about having been abducted by an alien “the other night,” you have no claim unless your reliance on the alien-abduction story was reasonable. [Six percent of Americans may be claiming they were victims of alien abduction. Click HERE if interested.] We’ll leave it for each reader, on her or his own, to opine as to the reasonableness of such reliance. Be careful, however. The Smithsonian Magazine, in 2016, wrote the following:

According to a 2009 Harris poll, 26 percent of Americans believe in astrology; that’s more people than believe in witches (23 percent), but less than believe in UFOs (32 percent), Creationism (40 percent) and ghosts (42 percent).

There was substantial evidence that the restaurant owner told the leasing agent, over and over, how important it was that there wasn’t a competing menu-theme restaurant at the mall, including doing so on the very day he signed the lease. He testified that he believed her because “she was a ‘professional’ and worked for a ‘supposedly reputable company.’” To the court, it didn’t matter that he never asked for the exclusive right to sell hot dogs as a principal menu item (as he should have).

In addition to seeking monetary damages, the restaurant asked that its lease be rescinded. After all, if an agreement is obtained through fraud, it should be voidable by the defrauded party. And, it can be. But, you can’t eat your cake and still have it. [That’s probably how Marie Antoinette said it.] The problem is that if the lease is rescinded, then there was no lease and your right to an award for future, lost profits can’t exist – no lease, no future at the premises. At least, that seems to have been the unstated logic behind the trial court’s ruling that the restaurant would have to choose between a damages award and a canceled lease. The appellate court put it this way:

[A] person claiming to be defrauded by false representation has a choice of two inconsistent remedies to wit, he may elect to rescind the contract; or, to affirm it and claim damages. He cannot do both. The right to damages exists unless and until the transaction is effectually disaffirmed.

The restaurant went for money. We don’t know what claims the landlord might still have had for future rent, but, as we can infer from what follows in this blog posting, it seems there was such a possibility.

The reason we speculate as such is that, separately, the restaurant’s owner asked the court to rescind the personal guaranty he had given in connection with the lease. The trial court judge denied that relief, ruling that the owner had not suffered any “individual damages” as a result of the landlord’s fraud. The appellate court thought differently. First, it found that the lower court judge did not have evidence sufficient to conclude that the owner had not suffered such harm. Also, there was a post-trial stipulation among the parties that all proofs for rescission had been satisfied. More importantly (as the appellate court put it):

In any event, it is well-settled that a party may rescind a contract even where the party does not suffer any pecuniary loss. … [T]he California Supreme Court [has] rejected the implication that “in every case there must be ‘pecuniary’ loss to obtain rescission for fraud.” … [T]he Supreme Court noted that injury could arise from the inability to make a “free choice”: “In a sense, anyone who is fraudulently induced to enter into a contract is ‘injured’; his ‘interest in making a free choice and in exercising his own best judgment in making decisions with respect to economic transactions and enterprises has been interfered with.’”

And, even though the lease “survived” the lawsuit, the guaranty was a separate contract, one also induced by the landlord’s fraud. That’s the basis by which the appellate court rejected the lower court’s ruling that the lease and the guaranty were inextricably linked and could not be treated separately. The actual question is not whether the two agreements were separate; it is whether the two parties (in this case, tenant and guarantor) were separate persons. You can defraud the tenant and not the guarantor, and vice versa. The tenant and the guarantor can choose separate remedies. This is the same law as would apply to a note and a personal guaranty.

Perhaps the most interesting aspect of the case we’ve been describing is how the court handled the issue of attorneys’ fees. Even though the tenant was a successful party, it came up empty-handed. In the United States, absent special circumstances, each party must bear its own legal expenses unless they have an agreement otherwise. Here, the lease provided that the landlord, but not the tenant, would be entitled to attorneys’ fees under certain circumstances. This was the relevant lease language:

In the event that, at any time after the date of this Lease, Landlord shall (i) consult with and/or retain an attorney as a result of Tenant’s breach of this Lease, (ii) prepare and/or serve a valid notice of default under this Lease and seek the cure of such default, or (iii) institute any action or proceeding against Tenant relating to or arising from the provisions of this Lease or any default hereunder, Tenant shall reimburse Landlord for its expenses, actual attorneys’ fees, and all fees, costs and expenses incurred in connection with such consultation, pursuit of rights, action or proceeding . . . .

When it comes to claims based on “contract,” California law converts this kind of unilateral attorneys’ fee provision into a mutual one. So, the tenant had the right to seek attorneys’ fees on the same basis as could its landlord.

The problem here was that the jury only found fraud on the part of the landlord. It did not find that the landlord had breached the lease. The lease’s attorneys’ fee provision did not cover fraud. Under California law, it could have; but, it didn’t. Although the phrase “on a contract” in the California “reciprocity” law is “liberally construed, it does not stretch to tort claims. [T]ort claims do not ‘enforce a contract’ and are not considered actions on a contract ….” Thus, the tenant came up empty-handed. The jury award was a little over $800,000; the tenant claimed attorneys’ fees of over $700,000. Ouch! A net return of only $100,000 would not have been what the tenant had in mind. Perhaps a settlement would have made sense. [We don’t know if that was ever on the table.]

In contrast, the landlord had to pay the restaurant owner’s attorneys’ fees. That’s because the attorneys’ fees provision in the guaranty was written differently. It said that a prevailing party had the right to “recover from the other attorneys’ fees and costs, including collection costs incurred” in “an action against the other arising out of or in connection with this Guaranty.” [We added the underlining.] Unlike that in the lease, this “expansive language” was sufficient to cover the tort of fraud. The fraud arose out of or was in connection with the guaranty. The owner successfully got its desired remedy – rescission. Thus, unlike in the case of the restaurant, he was entitled to an award of attorneys’ fees.

What does this teach us about an attorneys’ fee provision? Yes: “words matter.” Do your provisions cover torts (such as fraud) as well as breach of contract? Are they reciprocal? Do you know how your state’s law handles attorneys’ fee provisions? Do you use the same provisions in every state?

We have more thoughts, but only choose to offer one more of them. We think our thought ought to be obvious, but fear it isn’t. You can’t defraud someone and think you can hide your fraud behind a “you can’t rely on any representations that aren’t in this document” provision in the resulting agreement. Of course, it goes without saying (though we are doing so) – don’t defraud people.

Attention gluttons out there, if you want to read the California appellate court’s 21-page decision that served as the basis for today’s posting, you can do so by clicking: HERE.


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