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Court Affirms Use Of Specific Provisions To Rebut Evidence Of Misrepresentation In The Inducement Of A Lease

By: Yuliya A. Oryol
01/17/06

Hinesley v. Oakshade Town Center
C045865
California Court of Appeal, Third Appellate District
Filed 11/29/05; Pub. Order 12/29/05

The recent California Court of Appeal decision, Hinesley v. Oakshade Town Center ("Hinesley"), affirmed the value for real estate practitioners in proper cases to include specific disavowal provisions in leases.  The Court of Appeal held that such a specific disavowal can be used to rebut evidence of material misrepresentations in the inducement of a lease.  In so holding, the Court of Appeal distinguished between  1) general provisions that the lease contains the parties’ entire agreement (i.e. a generic integration/no oral representations clause), which the Court of Appeal explained cannot be used to rebut admissible and apparently truthful testimony that certain representations were made and relied upon, and 2) more specific provisions regarding certain types of representations, such as a statement that the lessor does not represent the presence of any specific tenants in the building or complex.  

In the Hinesley case, a lessee  was seeking to rescind a lease for approximately 1,200 square foot premises at the Oakshare Town Center Shopping Center.  He alleged that he executed the lease based on certain representations of the lessor’s agent, to wit: that the regional restaurant chain Dos Coyotes, the international coffee shop chain Starbucks, and the international ice cream and yogurt vendor chain Baskin-Robbins would also be leasing and occupying suites near the suite the lessee was to lease in the shopping center complex.  The lessee claimed that the lessor’s agent knew when these representations were made that the lessor did not have any contractual commitments from any of these businesses.  The lessee contended these alleged representations, which turned out not to be true, were material to his decision to enter into the lease and were relied upon by him.  The Court of Appeal, however, affirmed summary judgment for the lessor, the owner of the shopping center, on the theory that the lessee had failed to established reliance on the alleged representations made by the lessor’s agent with respect to other tenants in the shopping center complex. 

The specific provision in question, paragraph 25.33 of the lease, provided: "Lessor reserves the right to effect such other tenancies in the Shopping Center as Lessor in the exercise of its judgment shall determine to bet [sic] promote the interest of the Shopping Center.  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."  The lessee admitted in deposition to having read the lease, including paragraph 25.33.  The lessee also used an attorney to assist him in reviewing the lease.  In addition, during the course of the negotiations, the lessee never requested any revisions to paragraph 25.33.  The Court of Appeal determined that paragraph 25.33, plus the lessee’s conduct of not inquiring further about the other tenants in the shopping center complex, rebutted the lessee’s deposition testimony that the alleged representations, even if made, were material to the lessee’s decision to enter into the lease or were relied upon. 

The Court of Appeal explained that in general a party may claim fraud in the inducement of a contract containing a provision disclaiming any fraudulent misrepresentations and introduce parol evidence to show such fraud.  Fraud in the inducement renders the entire contract voidable, including any provision in the contract providing that the written contract is, for example, the sole agreement of the parties, that it contains their entire agreement, and that there are no oral representations.  Although the Court of Appeal agreed with the lessee that the inclusion of paragraph 25.33 in the lease may not be used by the lessor as a ploy to evade liability, the Court of Appeal nevertheless found that the alleged misrepresentations, even if found to have been made, were not material assertions on which the lessee justifiably relied in deciding to sign the lease  due to the existence and lessee’s knowledge of the specific provision in the lease which expressly provided that the lessee was not relying on the existence of other lessees in entering the lease. 

The Court of Appeal compared paragraph 25.33 to an "as is" clause in a lease or a contract.  Similar to an "as is" clause, paragraph 25.33 was not merely a generic integration/no oral representation clause.  Rather, it was a specific provision intentionally included by the lessor to affirm that the lessor does not represent that any specific lessees will also occupy space in the shopping center complex.  Although it agreed the lessor could not contractually insulate itself from its own fraud by inclusion of paragraph 25.33, the Court of Appeal concluded that the language in paragraph 25.33 should have conveyed to the lessee the implication that "the lease did not come with a guarantee that any particular businesses would be or stay cotenants" of the shopping center and that a lessee in a commercial lease situation has a duty of discovery.  The inclusion of paragraph 25.33 in the lease, just like an inclusion of an "as is" clause in a lease or a contract, should have put the lessee on notice to ask further questions and alerted him to the need for further clarifications. 

Hinesley does not hold that including a specific lease or contract provision, such as paragraph 25.33, will on its own automatically protect a lessor from liability for fraudulent inducement.  Nevertheless, it does reaffirm that, while the general boilerplate disavowals of reliance on representations may be of no value, specific disavowal clauses in leases or contracts can help to insulate a lease or contract from a claim for rescission for fraudulent misrepresentation.  The key is to anticipate special features of the transaction that may induce a party to enter into it and, when appropriate, to include specific disavowals of representations regarding such features.

John Hansen, a Partner in Nossaman’s San Francisco office, specializes in business litigation and can be reached at jhansen@nossaman.com

Yuliya Oryol is a senior associate in Nossaman's San Francisco office where she focuses on transactional matters for the firm's Real Estate and Infrastructure Groups and can be reached at yoryol@nossaman.com.

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