Recent Development Regarding Triple-Net Pass-Through Estimates in Commercial Leases

In a recent unpublished decision, Thrifty Payless, Inc. v. The Americana at Brand, LLC, the California Court of Appeal for the Second District held that a landlord may be held liable for underestimating pass-through lease expenses to tenants during negotiations. Thrifty, a tenant, was not precluded from arguing fraud, negligent misrepresentation, mistake, or breach of contract and implied covenant of good faith when its shopping mall landlord, Americana at Brand, underestimated the costs that would pass-through to Thrifty in its lease.

While the executed lease did not contain the estimated figures, estimates of taxes, insurance, and common area maintenance fees had been provided during the negotiation of the letter of intent and prior to the execution of the final lease. At the end of the first year of the term of the lease, Americana ultimately charged Thrifty approximately four times as much in estimated taxes, three times as much in insurance, and twice as much in common area maintenance fees.

Despite the estimated pass-through fees were explicitly stated as “estimates” during negotiations and despite the final contract was fully integrated with no estimates included, the court held that neither the parol evidence rule nor the overriding contractual terms would prohibit a fraud claim from being brought. (See Riverisland Cold Storage, Inc. v. Fresno-Madera Production Credit Assn., (2013) 55 Cal.4th 1169, 1174-1175).

While this opinion from the California Court of Appeal was unpublished and not to be used as precedent, we think it prudent that commercial landlords and tenants—not just in California, but across the nation—be aware of this case. In particular, landlords should be cautious when providing estimates during the course of negotiations with tenants, since even strong exculpatory language in fully integrated final leases may not be enough to insulate landlords from liability if actual costs turn out to be greater than anticipated.

To learn more about this case, and its likely effect upon landlords and tenants, please contact Jason Grinnell at 213-457-1761, Robert C. Linton at 312-627-2274 or your Dykema relationship attorney.

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