Tenant Can Sue Owner for Fraudulent Inducement

Facts: A jewelry store that rented space in an outdoor shopping center sued the owner of the center for fraud. At the time the tenant expressed interest in renting space in the center, the owner represented that a second center, “Phase II,” would be built next door, creating a large shopping complex and that national anchor tenants were prepared to rent space in the center and space at Phase II when it was completed, bringing foot traffic to the area around the tenant. In reliance on those representations, the tenant signed its lease.

After it became clear that Phase II wouldn't come to fruition and the tenant discovered that no national anchor tenants had signed leases at the center, the tenant sued the owner for “fraudulent inducement.” It asserted that the owner had fraudulently induced it to sign the lease when it represented to the tenant that Phase II would be built and that several attractive anchor stores were committed to becoming tenants at the center and at Phase II.

The tenant claimed it suffered monetary damage in the form of remodeling costs, lost profits, unexpected rent costs, and other expenses related to the representations. The tenant stopped paying its rent. The owner sued the tenant for breach of the lease based on its failure to pay rent and other charges that the tenant owed under the lease provisions. The owner asked the trial court for a judgment in its favor without a trial. The trial court denied the request, and the owner appealed.

Decision: An Ohio appeals court reversed the decision in part and ordered a new trial.

Reasoning: On appeal, the owner argued that the trial court erred in finding that it fraudulently induced the tenant into signing a lease for its space at the center. It contended that the supposed representations that the tenant claimed that the owner had made contradicted the express terms of the lease. Consequently, the representations violated the “parol evidence rule” and should not have been considered by the court, stated the owner. The tenant argued that the representations fell outside of the parol evidence rule because they were not being used to contradict the terms of the lease agreement, but rather to establish the claim that the tenant had been fraudulently induced to rent space at the center.

The parol evidence rule states that “absent fraud, mistake, or other invalidating cause, the parties' final written integration of their agreement may not be varied, contradicted, or supplemented by evidence of prior or contemporaneous oral agreements, or prior written agreements.” The appeals court pointed out that the parol evidence rule “does not prohibit a party from introducing parol or extrinsic evidence for the purpose of proving fraudulent inducement”; however, the parol evidence rule “cannot be avoided by a claim of fraudulent inducement where the alleged inducement was a promise that directly contradicts or pertains to exactly the same subject matter as the final terms of the contract.” The alleged inducement must fall outside the terms of the contract.

Here, the appeals court found that the tenant's fraudulent inducement claim was based on two distinct representations: (1) that Phase II would be built; and (2) that national anchor stores would occupy space in the center and at the new complex. In order for a representation to contradict a lease, the lease must address the representation, or the exact same subject matter as the representation. In this case, the alleged representation was essentially a description of Phase II and its future tenant makeup. But the lease did not define or describe Phase II. Phase II did not appear within the lease in any provisions. Therefore, prior or contemporaneous representations that described or defined Phase II were extrinsic from the lease and were not in violation of the parol evidence rule, the appeals court decided. “Representations by the lessor regarding a future shopping center were not embodied in the contract, and thus the parol evidence rule did not bar evidence used to prove those representations for the purpose of a fraudulent inducement claim,” said the appeals court.

However, the alleged representation about future anchor stores was not extrinsic from the lease terms. The owner argued that this alleged representation was in direct conflict with and pertained to the same subject matter as one of the provisions in the lease and, therefore, the representation should have been barred because it violated the parol evidence rule. The appeals court agreed, noting this lease provision: “Tenant cannot rely on any representations other than those specifically set forth in this Lease concerning proposed tenants for the shopping center.” The representation alleged by the tenant pertained to the occupancy of future tenants in Phase II and was in direct conflict with the final terms of the lease. Thus, any evidence that pertained to that representation violated the parol evidence rule, the appeals court determined.

Because the trial court incorrectly admitted evidence of the prior representation by the owner regarding the occupancy of future tenants in Phase II, the appeals court had to determine to what extent the trial court's error in allowing the parol evidence affected the ruling that the tenant was fraudulently induced. As a result, it ordered a new trial.

• Licata Jewelers, Inc. v. Levis Commons, LLC, et al., September 2011