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Impact of CAM Estimates in LOIs

by / Sunday, 23 February 2014 / Published in Articles

Impact of CAM Estimates in LOIs  

By Bryan Mashian 

 

Letters of intent routinely include estimates of the amount of anticipated common area expenses (CAM), and most real estate professionals believe such estimates will not bind the parties later. But, in a recent case, the court ruled that the tenant could rely on these estimates despite the statement in the lease that the lease was the final and binding agreement of the parties.

Thrifty leased space from The Americana at Brand at its shopping center in Glendale, California. Landlord’s letter of intent listed Thrifty’s share of estimated real property taxes, insurance and common area expenses for the first year of the lease term and clearly identified the dollar amounts for these charges as estimates. Thrifty requested a budget and was even reminded that the costs were purely estimates.

Thrifty’s lease calculated Thrifty’s share of common area operating expenses by excluding the floor area of “Other Stores”, where tenants were permitted to contribute to Common Area Operating Expenses on a basis other than Thrifty’s and also excluded certain “Non?Retail Portions” of the center. Landlord also reserved the right to allocate expenses between the retail portions and the non?retail portions of the center.

Thrifty got a sticker shock after receiving the first CAM bill since the amounts were two or three times higher than the estimated amounts, amounting to over $300,000 for the first year alone. Thrifty sued for fraud, rescission, breach of contract and breach of the implied covenant of good faith and fair dealing.

The lease contained the typical integration clause which makes the lease the final and binding agreement of the parties, and also provided that Thrifty was not relying on any statement or representation of Landlord. Nevertheless, the court of appeal ruled that Thrifty could rely on the estimates in the letter of intent and that landlord breached the implied covenant of good faith and fair dealing by improperly exercising its discretion in allocating common area expenses between retail and non?retail portions of a shopping center.

Clearly, estimates in letters of intent can form the basis for a fraud claim. The parol evidence rule allows evidence other than from the written contract to show that the agreement was obtained by fraud. The court in the Thrifty case found that oral promises made outside of a written contract can be the basis for a fraud claim where a party can show it justifiably relied on the promise. Landlord argued that it only gave an estimate and no representation. But the court stated that a party that commits fraud cannot “absolve himself from fraud by any stipulation in the contract, either that no representations were made or that any right that might be grounded upon them was waived.” So, square footage figures or budgeted operating expenses in letters of intent which are estimates cannot protect a landlord from a tenant’s claim of fraud if they are negligent or intentional misrepresentations and justifiably relied upon by the tenant.

How it allocated common area expenses between the retail and non?retail portions of the shopping center. Landlord was required by the lease to use “reasonable discretion” and “sound accounting and management principles.” This language was enough for the court to rule that Thrifty had sufficiently alleged that landlord had improperly allocated expenses in violation of the implied covenant of good faith and fair dealing.

Landlords and brokers should not blindly rely on statements in letters of intent and in leases that purport to waive a tenant’s rights to look outside the lease contract.

 

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