Require Tenant's Acknowledgments to Avoid Fraud Claim for Leasing Agent's Misstatements

August 31, 2007

During lease negotiations, prospective tenants usually pepper a leasing or managing agent with questions—for example, “Which other tenants will be moving into the center?” and “Will my space be near a particular named anchor?” To induce the prospect to rent the space, the agent may sometimes present preliminary information as if it's set in stone or guess at the answer. Though the agent's answer may clinch the deal, it could later backfire on you. If the agent's answer turns out to be wrong or misleading, the tenant may use that misstatement as a reason to get out of the lease.

During lease negotiations, prospective tenants usually pepper a leasing or managing agent with questions—for example, “Which other tenants will be moving into the center?” and “Will my space be near a particular named anchor?” To induce the prospect to rent the space, the agent may sometimes present preliminary information as if it's set in stone or guess at the answer. Though the agent's answer may clinch the deal, it could later backfire on you. If the agent's answer turns out to be wrong or misleading, the tenant may use that misstatement as a reason to get out of the lease.

You can help lower that risk by instructing your agents on what they can and can't say to prospective tenants. But instructions alone aren't good enough, warns Chicago attorney M. Rosie Rees. And while a lease clause may say that the lease reflects the entire agreement between the parties, that clause may not be enough either. Rees recommends that you add a provision to the lease to lower the chances that a tenant will sue you over careless statements made during lease negotiations. There's a Model Lease Clause on p. 4 that can help. Plus, we'll give you a special disclaimer that your leasing agent can add to his merchandising plan for your center as an additional protection.

Proper Lease Language Can Protect You from Liability for Misstatements

Tenants have sued owners over careless statements made during lease negotiations. But, fortunately, a tenant may not win that type of lawsuit if the owner has the right language in its lease. For example, in California, a tenant alleged that during lease negotiations, the owner's leasing agent named three chain tenants that would be leasing spaces near the tenant's space at the shopping center by a certain date. But two of those chains never leased space at the center, and the third leased space a few years later. The tenant sued the owner, claiming that the owner's leasing agent knew it was making false statements, because none of those chains had committed to lease space at the center at that time, and that the owner failed to disclose that fact. The tenant added that it lost profits because those chains weren't at the center.

A California appeals court dismissed the tenant's lawsuit. Although the leasing agent's statements about the three chains were false, the owner proved that the tenant didn't rely on them when it signed the lease. A lease clause said that the tenant “does not rely on the fact” nor does the owner “represent that any specific [tenant] or type or number of [tenants]” will “occupy any space in the Shopping Center” during the lease term. And the tenant admitted that it had read the entire lease before signing it.

Also, the court noted, the tenant and its attorney had requested changes to the lease—but not to that clause. And the tenant never expressed any concern nor raised any questions about the other tenants in the center [Hinesley v. Oakshade Town Center, November 2005].

Federal courts have since upheld the decision that, to prevail on a claim of fraud, a party must prove—among other things—that it actually and justifiably relied on the statement at issue [Express LLC V. Fetish Group, Inc., September 2006].

Make Sure Your Lease Includes Disclaimer

While the disclaimer used in the California lease protected the owner, Rees suggests a disclaimer that's even broader and will protect you better. She recommends that your disclaimer, like the one contained in our Model Lease Clause, require the tenant to acknowledge each of the following:

  • You haven't made any representations regarding the presence of a certain tenant or store, or the number, types, or hours of operation of tenants or stores at the center [Clause, par. a];

  • The tenant wasn't induced to rent the space because of any information it got from you or any of your agents before signing the lease [Clause, par. a];

  • The tenant did its own investigation to verify the truth of any information provided by you or your agents [Clause, par. b];

  • The tenant isn't released from its lease obligations if another tenant abandons or stops its business at the center [Clause, par. c];

  • The lease's site plan is intended only to show the general layout of the center [Clause, par. d(i)];

  • The lease's site plan doesn't amount to a warranty by you as to the center, the tenant's space, the existence of any particular big stores, or any other matter shown on the site plan [Clause, par. d(ii)]; and

  • All measurements and distances are only approximate and not properly scaled [Clause, par. d(iii)].

If the lease contains all of those acknowledgments, the owner will be armed with defenses against any claim by the tenant of fraud or negligent misrepresentation, notes Rees.

Add Disclaimer to Leasing Agent's Merchandising Plan

Have your leasing agent add a disclaimer to the merchandising plan that he uses to sell your center, advises Rees. The disclaimer is an added protection to help keep you and your agent out of hot water in case your merchandising plan provides just preliminary information. Rees recommends that the disclaimer be written in all capital letters, so that a prospective tenant will notice it. The disclaimer should say the following:

  • The merchandising plan is intended only to be an “approximate”—not exact—depiction of the center as it's currently expected to be constructed;

  • The plan doesn't contain the exact leasing lines or demarcations of any of the spaces;

  • The plan doesn't depict the exact location of any possible tenants or occupants of the center; and

  • The plan isn't a representation or warranty that any retailers named in the plan will occupy space at the center or that the center will be constructed as depicted.

Model Language

THIS PLAN IS DIAGRAMMATIC ONLY AND INTENDED ONLY AS AN APPROXIMATE DEPICTION OF THE SHOPPING CENTER AS IT IS CURRENTLY EXPECTED TO BE CONSTRUCTED. THIS PLAN DOES NOT CONTAIN THE EXACT LEASING LINES OF ANY PREMISES NOR DOES IT DEPICT THE EXACT LOCATION OF ANY POSSIBLE TENANTS OR OCCUPANTS OF THE SHOPPING CENTER. THIS PLAN DOES NOT CONSTITUTE A REPRESENTATION OR WARRANTY THAT ANY RETAILERS NAMED IN THIS PLAN WILL OCCUPY PREMISES IN THE SHOPPING CENTER, NOR THAT THE SHOPPING CENTER WILL BE CONSTRUCTED AS DEPICTED.

Practical Pointer: To further protect your interests, put a disclaimer on the site plan attached to the lease, says Rees. In a future article, we'll give you language to put in your site plan disclaimer for both new and existing centers.

CLLI Source

M. Rosie Rees, Esq.: Partner, Pircher, Nichols & Meeks, Chicago, IL

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