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Real Property Law

Court of Appeal Further Limits Landlords’ Defenses Against Fraud in Leasing

Orozco v. WPV San Jose, Case No. H044014 (Cal. App. 6th June 17, 2019)

By Dan Robinson

A lease warrants the tenant did not rely on representations about other tenants in signing the lease. So the tenant can’t sue for fraud when the landlord breaks his oral promise not to lease to other restaurants, right? Not necessarily.

On June 17, the Court of Appeal upheld a Santa Clara Superior Court jury verdict in favor of a commercial tenant who sued his landlord for fraud. The tenant, Solid Restaurant Ventures, represented by its principal Orozco, leased space from the defendant’s predecessor in a shopping center in San Jose for a restaurant, Pauly’s Famous Franks N Fries. Orozco also signed a personal guarantee for the lease.

Before signing the lease, however, Orozco asked the leasing manager numerous times to assure him that no competing restaurants would open in the same shopping center. The jury found the leasing manager promised him that they would not lease space to any competing restaurants. Nevertheless, Al’s Beef, which also specializes in hot dogs and french fries, opened only two spaces away soon after Pauly’s opened. The jury found the leasing manager was already negotiating a lease with Al’s at the time that she assured Orozco she would not lease to any competing restaurants.

The lease contained an integration clause as well as several disclaimers indicating that the landlord had not made any representations about other tenants, including future tenants, at the shopping center. Nevertheless, the jury rendered verdicts that the landlord had committed the torts of intentional misrepresentation and concealment in the negotiation of the lease and awarded Solid Restaurant Ventures compensatory damages.

On appeal, the landlord (Vornado Realty Trust and its subsidiary WPV San Jose, LLC, later succeeded by Vornado San Jose, LLC) argued that the integration and exculpatory clauses shielded it from liability, particularly because Orozco admitted he had not read the entire 80-page lease. Relying on the California Supreme Court’s decision in Riverisland Cold Storage, Inc. v. Fresno-Madera Production Credit Assn., the Court of Appeal held that the exculpatory clauses were not dispositive because they did not directly contradict the leasing agent’s promises. As the Riverisland Court explained, “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.” (2013) 55 Cal.4th 1169, 1177.  (Separately, the Court of Appeal also held Orozco was not the same entity as Solid Restaurant Ventures and thus had not given up his remedy of recission when Solid elected compensatory damages.)

In contrast, the case might have turned out differently if the lease had expressly stated that the landlord reserved the right to lease space to competing restaurants. As the Court of Appeal explained, reliance on oral statements may be unreasonable as a matter of law where they are “patently at odds with the express provisions of the written contract.” (Citing Hadland v. NN Investors Life Ins. Co. (1994) 24 Cal.App.4th 1578, 1589.)

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