Did Commercial Real Estate Broker Commit Fraud?

In their eagerness to get the lease signed, brokers may be inclined to make statements about what the document says (or doesn’t say) to allay the concerns of one of the parties. So, what happens if the landlord or tenant takes the broker at its word and signs the lease, only to discover that the broker’s assurances were wrong? Does the party that relied on the assurances have a valid claim for fraud against the broker? A recent case from California sheds some light on this question.

The Case

A TV parts sourcing company leased a warehouse for five years at $5,000 per month. A year later, with the tenant three months behind on its rent and the landlord eager to sell the property to the buyer it had lined up, the parties called in the same broker who negotiated the original lease to put together a termination agreement. The deal let the tenant out of the lease, provided that it pay the $15,000 in rent arrears. It also gave the landlord a security interest in the tenant’s inventory allowing the landlord to sell the goods if the tenant didn’t make its payments under the termination agreement. And that’s exactly what happened. The tenant cried foul and accused the landlord and broker of fraud.

The termination agreement clearly stated that the landlord could sell the inventory if the tenant defaulted. It also included a standard provision known as a “merger clause” specifying that the terms of the written agreement constitute the entire agreement and specifying that there were no other promises, agreements, or understandings between the parties. But the tenant insisted that there was an implicit agreement that the goods wouldn’t be sold. The tenant admitted to signing the agreement without reading it. But, the tenant argued, the broker rushed us and repeatedly assured us that we’d have exclusive control over the inventory.

Lease Interpretation Law, 101

A law called the “parol evidence rule” requires judges tasked with interpreting a lease or other written contract to look only to the terms of the agreement and not consider extrinsic evidence of the parties’ intentions. This is particularly true when the lease includes a merger clause. However, the tenant hung its hat on an important exception: The parol evidence rule doesn’t bar evidence that one of the parties committed fraud.

The Court’s Ruling

The California court didn’t buy it and tossed the tenant’s case without a trial. The reasons why are fairly instructive about the parameters of brokers’ liability for fraud:

Broker didn’t make a false statement. First, the broker’s alleged statement that the tenant would have exclusive control over the inventory didn’t amount to a false representation. The tenant did have the right to control the inventory as long as it made its payments, and there was no evidence that the broker promised that it would retain that control even after it defaulted.

No justification for tenant to rely on statement. Even if the broker had made a false statement, the tenant would still lose. Explanation: To prove fraud, the tenant had to show not only that the broker made a false statement, but that he reasonably relied on the statement. The court found that the tenant “could not have justifiably relied on the broker’s statements when he had the opportunity to read the lease termination agreement but failed to do so. Had he read the agreement, he would have seen the unambiguous provision giving [the landlord] a security interest” (Trans World Sourcing v. Prend, 2020 Cal. App. Unpub. LEXIS 6706, 2020 WL 6054328).

Takeaway

Brokers need to be careful about making assurances to a landlord or tenant about what a lease agreement purports to say. As illustrated by the Prend case, even if the broker’s purported description of the lease is accurate, there’s a risk that it may be misinterpreted. Such miscommunications create the potential for not just future enmity but also litigation.

But the other takeaway from Prend is that landlords and tenants are expected to read the leases they sign and not rely on their brokers to tell them what it says. As the Prend court notes, it’s generally not reasonable to fail to read a contract, even if a broker tells you that you don’t have to read it.

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