During LOI negotiations, it is common for landlords to provide prospective tenants with estimates of the amount of taxes, insurance, and common area maintenance charges (CAMs) that a tenant will be required to pay during the lease term. To avoid uncertainty and unexpected cost overruns, some tenants that have sufficient leverage demand that these estimates include a cap on at least some, if not all, of such expenses. Those tenants that do not negotiate such a cap into their leases run the risk that the landlord’s actual charges may be significantly higher than the estimated amount of charges, which will result in these unprotected tenants being forced to pick up the difference. Based on the recent case of Thrifty Payless, Inc. v. The Americana at Brand, LLC, however, these tenants that were previously considered unprotected now have a potential new defense against such cost increases.
In Thrifty, the parties negotiated an LOI in 2004 that contained the landlord’s estimates for taxes ($3.00 psf), insurance ($0.80 psf), and CAMs ($14.50 psf). After some back and forth between the parties about these estimates, the landlord provided some additional explanation of the estimates, including that the tenant’s percentage share of the project expenses based on its size would be 2.2%, and noted, “Please remember that the costs reflected are purely estimated values.” Several months later, the parties signed the lease, which contained an integration clause that stated that all prior negotiations and discussions were superseded by the terms of the lease. The lease did not reference any of the estimated charges or specify tenant’s actual percentage share of expenses. Instead, the lease contained a formula that would be used to determine tenant’s percentage share. In 2009, the first full year in which Thrifty was obligated to pay taxes, insurance, and CAMs, the landlord charged Thrifty $169,686.00 for taxes (instead of the $43,836.00 that would have been due based on the LOI estimate), $28,110.00 for insurance (instead of $11,689.60), and $412,307.00 for CAMs (instead of $211,874.00) based on 5.67% of the total expenses for the project, rather than 2.2%. Thrifty sued. The trial court dismissed Thrifty’s lawsuit on a demurrer and Thrifty appealed. The appellate court reversed, thereby allowing the lawsuit to proceed to trial.
In reaching its decision, the appellate court rejected the landlord’s argument that the LOI figures were mere estimates that Thrifty was not entitled to rely upon, and that the estimates were not actionable because of the integration clause of the lease. Instead, the appellate court agreed that Thrifty was entitled to allege intentional and negligent misrepresentation based upon the landlord’s “grossly inaccurate estimates.” The court added, “Indeed, the huge disparity between the estimates and the ultimate costs supports an inference of misrepresentation.”
This ruling should sound the alarm for all landlords. Prior to this case, many landlords believed that they would not be bound by any prior estimates provided to tenants during lease negotiations so long as such estimates were not reflected in the lease. Some landlords even refer to estimates in their leases and emphasize that such estimates are in fact just estimates that the tenants are not permitted to rely upon, and require the tenants to pay whatever the actual amounts are. As Thrifty shows, such practices are open to attack, at least when the estimates are “grossly inaccurate.” Interestingly, in Thrifty, the problem doesn’t appear to be so much of an inaccurate per square foot estimate as it is a problem of miscalculating the tenant’s percentage share of the expenses that was off by more than double. At a minimum, landlords should be careful in estimating percentage shares during lease negotiations without having sufficient certainty that such estimates will be accurate.