What’s the first thing your parents tell you about contracts? Cast your mind back to opening your first bank account. Your dad’s sitting beside you as the clerk hands over the papers, and you make a beeline for the signature so you can feel like an adult, and your father sternly moves your hand away and says “read the whole thing, fool.” The clerk smirks. The humiliation ensures that you never forget that sage advice.
Thoroughly reading through the terms of a contract may seem like common sense, but you’d be surprised just how many people still head straight for that dotted line with no regard for the reams of text preceding it. Usually, this means the tenant has no recourse if they’re unsatisfied with something that’s clearly outlined in the lease. But what if an unscrupulous landlord – or their unscrupulous representative(s) – make false promises, verbally, and don’t follow up in the contract? And what if the tenant only realizes they’ve been fleeced after signing, without having read the whole thing properly? Is it their fault?
The answer might surprise you. For details, let’s look into Orozco v. WPV San Jose, a surprisingly compelling case with plenty of meat to it.
(The joke is that there’s a lot of literal beef in this story.)
Orozco is just one in a line of cases whose decisions have built on the California Supreme Court decision in Riverisland Cold Storage, Inc. v. Fresno-Madera Production Credit Assn. Essentially, this case established a fraud exception to the parol evidence rule, which is a rule meant to make the terms of a written contract the exclusive evidence of an agreement between parties. Most contracts come with an integration clause, as well, which confirms that the written agreement is the final expression of all negotiations. Riverisland involved borrowers who’d worked out in a face-to-face meeting with the lender’s representatives that they had a couple of years to pay back their loans, and needed to pledge two properties as collateral. The written agreement had a much shorter repayment period and a lot more properties as collateral. In the end, the California Supreme Court decided that an integrated contract can be challenged if one of the parties intentionally misled the other in verbal communication. Other cases used Riverisland as a precedent, with one, Julius Castle Restaurants, Inc. v. Payne, establishing that even sophisticated parties can claim to have been misled (i.e. an expert in the relevant field can still be lied to, not just Joe Sixpack).
That brings us to Orozco.
Paul Orozco took a gamble. After years spent toiling in restaurants, he decided he wanted to open his own place, a high-end take on a hot dog joint with gourmet offerings and specialty fries. The place he’d staked out was a San Jose shopping center that lacked a similar restaurant on the premises. Perfect. And the landlord’s representative told him no competing businesses were asking after the other vacant spaces. If shoppers wanted to munch on wurst, they’d have to come to Orozco. All throughout the half dozen in-person negotiations, Orozco was told repeatedly that he’d be the only game in town, and, confident and eager to start, Orozco signed a ten-year lease in September 2011.
But all wasn’t well in the land of snacks and shops.
Behind Orozco’s back, the landlord’s rep was engaged in some back alley weenie dealings with national hot beef, hot dog, and french fry chain Al’s Beef. Not only is the overlap in customer demographic glaringly obvious, the prospective franchisee even tried to obtain a use restriction forbidding other tenants from selling hot dogs. While they didn’t get it, the landlord’s rep granted them the exclusive right to sell hot beef sandwiches. Orozco’s lease, meanwhile, had a category titled “Prohibited Uses and Exclusive Uses,” but Al’s Beef Exclusive was not listed. Hmmm. Curious.
When Orozco opened his business in Fall 2012, he enjoyed booming success and his dogs were selling like hot (dog) cakes. But, six months later, when Al’s Beef opened two doors down, Orozco saw his sales drop 24 percent in the first week, which grew to 30% overall. Orozco was forced to close down shop in late 2013, when his finances couldn’t bear it any longer.
Considering what seems like deliberate obfuscation of facts by failing to mention Al’s Beef at any stage of the proceedings, you might expect Orozco to be pretty mad, and… you’d be right! He sued the landlord for intentional fraud (inducing him to enter into the lease under false pretenses), fraudulent concealment, and negligent misrepresentation. Here’s where it gets interesting: the lease actually contained an integration clause, stating that the written contract was the sole agreement between them and that it superseded any other evidence or negotiations, as well as disclaimers saying the landlord had made no representations about other tenants, including future ones. In court, Orozco admitted he signed without fully reading the 80-page lease… which is even more damning considering he’d worked in the food industry for years and should have known not to skim-read legal documents.
I mean, on one hand, I guess people’s laziness/credulity helps me get clients at the end of the day, but this sort of everyday legislative illiteracy? It hurts, man. It hits me in the lawyer heart muscle.
Anyway. It’s not unreasonable to expect the case to be lost on the basis of this admission, but Riverisland & Co. come to the rescue. The jury found in favor of Orozco on the basis of intentional misrepresentation and awarded damages, including lost profits. The landlord tried to appeal, saying Orozco should have read the lease better, but the court of appeal not only upheld the decision but made the landlord pay Orozco’s legal fees too. In the end, Orozco walked away with $870,000 in damages, plus $700,000 in attoney’s fees. That’s a lot of hot dogs.
There’s plenty you can learn from this case. Limit communications in the process leading up to the contract to avoid making untrue statements, even if it’s just a slip of the tongue, and when you do communicate, make sure it’s through someone you really trust and limit how many people can talk on your behalf. Use integration clauses and execute estoppel certificates to confirm that both you and the other party are on the same page. Keep in mind that California’s greatly expanded the fraud exception to parol evidence. Oh, and maybe most importantly? Don’t lie and don’t try to pull a fast one. It’s that easy.
Now, if you’ll excuse me, I’m going to my local fast food place. Somehow, I’ve built up a heck of an appetite.