Underestimating Expected CAM Costs Wasn’t Fraudulent Inducement

What Happened: A lease for 5,000 square feet of restaurant space required the tenant to pay CAM costs but didn’t specify a figure or include a cap. As the lease was about to begin, the landlord offered an estimate of $6 per square foot. And that’s what the tenant paid. After accepting the payments for three years, the landlord began billing the tenant for annual CAM payment arrearages. The tenant was taken aback when asked to pay up to $17.33 rather than the expected $6 per square foot in CAM costs. The tenant refused to make the adjustment payments, and the landlord began applying the tenant’s monthly base rent payments to the unpaid CAM adjustment bill. Before long, the sides were squaring off in court. Among the key issues: Did the landlord understate the required CAM payments to fraudulently induce the tenant to lease the space? The lower court said yes, and the landlord appealed.  

Decision: The Kentucky Court of Appeal, the highest in the Commonwealth, reversed the lower court’s ruling on the fraud issue.  

Reasoning: The heart of the claim was the $6 estimate, which the tenant claimed it relied on in signing the lease. The tenant admitted to understanding that it was just an estimate but contended that the landlord made it seem like it was based on actual analysis. But while the estimate turned out to be way off, the Court said it was neither deliberately deceptive nor reckless: The property was still under construction and nobody knew what it would cost to maintain until it opened and actual charges were incurred; and $6 per square foot was in line with local market CAM rates at that time.

• Louisville Galleria, LLC v. Ky. Pub Invs., LLC, 2019 Ky. App. Unpub. LEXIS 320, 2019 WL 1967970 (May 2019)