Thrifty Payless, Inc. v. Americana At Brand,, 281 Cal.App.4th, 1230

In 2004, Thrifty Payless, Inc., the tenant, and Americana At Brand, LLC, the landlord of a new shopping center, negotiated an LOI which provided specific, but estimated CAM charges. The final Lease between the parties did not specify the actual CAM charges that Thrifty would pay, and provided only that Thrifty would pay its pro-rata share, for which no specific percentage was given. The first full year that Thrifty was obligated to pay CAM charges, Americana sent it a bill which was approximately $125,000 more than the estimated CAM charges stated in the LOI. Also, Thrifty’s pro-rata share was calculated at 5.67%, not 2.2%, as estimated in the LOI. Thrifty sued for fraud, negligent and innocent misrepresentation, mutual mistake, breach of contract and breach of the Lease.

Thrifty alleged that Americana was experienced and had superior knowledge about operating comparable centers and that the estimates stated in the LOI were false. Even if the estimates were not false, argued Thrifty, then a mutual mistake had been made since the Lease did not conform to the parties’ intent. Thrifty also alleged that Americana breached the Lease and the implied covenant of good faith and fair dealing by negotiating deals with other tenants that shifted costs disproportionately.

Americana argued that Thrifty had agreed that the Lease superseded the LOI pursuant to an “integration clause,” which stated that the Lease was the entire agreement between the parties. Americana also argued that Thrifty had accepted the Lease based upon its own investigation and that the CAM figures given were estimates only. For these reasons, the trial court found in favor of Americana. Thrifty appealed.

The “parol evidence” rule states that an integrated written agreement cannot be varied by extrinsic evidence (evidence beyond the written contract). However, an exception to the rule is that extrinsic evidence can be considered where there is an allegation that the contract was procured by fraud. On appeal, the Court found that the integration clause did not bar Thrifty’s allegation of intentional and negligent misrepresentation and that the LOI could be considered in determining whether or not fraud had occurred. Also, the Court held that Thrifty had shown that its reliance on the estimates were reasonable, given the fact that Americana was already operating similar shopping centers.

The Court also affirmed another exception to the parol evidence rule that extrinsic evidence can be considered when “the court must divine the true intentions of the contracting parties and determine whether the written agreement accurately represents those contentions.” In other words, the Court held that the LOI could be considered in determining whether or not a mutual mistake had occurred. The Court determined that Thrifty had asserted in sufficient detail the misrepresentations made in the LOI and therefore it was entitled to seek reformation and rescission of the Lease.

Lastly, the Court found that even though the Lease did not specify Thrifty’s pro-rata share of CAM, Thrifty was entitled to allege that Americana had breached the Lease and the implied covenant of fair dealing by improperly shifting costs between retail and non-retail space.

BOTTOM LINE: LOIs should be as close to realistic as possible, supported by proper calculations. Leases should be specific as to a tenant’s pro-rata share of CAM charges and integration clauses will not absolve a landlord from all representations made during lease negotiations.

“This information is for educational purposes only and not intended to constitute legal advice. Every project and property is unique. Please seek legal counsel for advice specific to your project.”