Any tenant who has entered into a commercial lease in California is probably familiar with the standard lease language regarding the size of the leased premises:  the size set forth in the lease is an approximation which the parties agree is reasonable and the rent will not be changed if it turns out that the actual size is more or less.  Moreover, the lease will also state that the tenant has made any investigations it desires and is responsible for doing so (or not doing so).  Most tenants do not actually measure the space but instead rely on the integrity of the landlord.

In a recent California case entitled McClain v. Octagon Plaza, LLC, a shopping center tenant (McClain) sued the shopping center owner (Octagon) for misrepresentation of the size of the leased unit in the lease.

Background:  The parties entered into an AIR Standard Multi-Tenant Lease (Net) for a 2,624 square foot retail space.  Paragraph 1.2(a) described the size as “approximately 2,624 square feet” while paragraph 2.1 stated that the parties agree that this is an approximation which the parties agree is reasonable and that the rent is not subject to revision if the actual size is more or less.  The lease also required the tenant to pay Common Area Operating Expenses (CAMs) of 23%.

Prior to signing the lease, the tenant attempted to confirm the size of the unit.  The landlords purported to be offended by her inquiries and represented that measuring the area would be unreasonably expensive.  They insisted that they had intimate knowledge of every detail of the shopping center and that the tenant could rely on their representations.

The Lawsuit:  The tenant sued the landlord for, among other things, misrepresentation, stating that because the landlords’ pretense that they were offended by her request to confirm the size of the unit and the landlords’ repeated assurances that the tenant could rely on the landlords’ honesty and accuracy, the tenant was induced to accept their representations and placed reasonable reliance on those representations in executing the lease.

Later, the tenant obtained a copy of the landlord’s application for earthquake insurance, which disclosed that the correct size of the shopping center was 12,800 square feet rather than 11,835 square feet and that her unit was 2,438 square feet rather than the 2,624 square feet represented.  This had the effect of overstating her rent by almost $269 per month and causing her to pay 4% more in CAM (common area maintenance) charges than she should have.  As a result of the misrepresentations, the tenant was induced to enter into a lease that obliged her to pay excess rent of more than $90,000 over the term of the lease.

Legal Analysis:  The key issue in the case is whether the terms of the lease rendered the tenant’s real estate fraud claim untenable.  In other words, did the language saying that the parties agree the approximation is reasonable, that no rent adjustment would be made and that tenant must do whatever investigation it desired operate to defeat the tenant’s lawsuit for misrepresentation?

The court noted that “a party to a contract who has been guilty of fraud in its inducement cannot absolve himself or herself from the effects of his or her fraud by any stipulation in the contract, either that no representations have been made, or that any right that might be grounded upon them is waived.  Such a stipulation or waiver will be ignored, and parol evidence of misrepresentations will be admitted, for the reason that fraud renders the whole agreement voidable, including the waiver provision.”

Just as an ‘as is’ provision in a contract does not insulate a contracting party from fraud claims, the stipulation intending to bar a fraud claim does not bind the party and the insertion of language agreeing that a material misrepresentation is “reasonable” is of no effect.

The court reinstated the case, allowing it to proceed to trial so that the tenant could establish that the approximations were, in fact, materially and unreasonably inaccurate.

Laine T. Wagenseller is a real estate litigation attorney in Los Angeles.  Wagenseller Law Firm specializes in real estate fraud, breach of lease and other real estate lawsuits.  You can contact Mr. Wagenseller at (213) 996-8338 or ltw@wagensellerlaw.com.  For more legal articles on real estate litigation and business litigation issues, please visit www.wagensellerlaw.com.