Case: McClain v. Octagon Plaza, LLC, Case No. B194037 (Cal. Ct. App. 1/31/08)

The One Sentence Summary: Where retail lease requires tenant to pay its share of common area expenses based on landlord’s statement of the expenses, tenant is entitled to review landlord’s supporting documentation to verify that the stated expenses were incurred and that the amounts are accurate.

What They Were Fighting About: Plaintiff McClain, doing business as A+ Teaching Supplies, entered into a lease for space at a shopping center owned and managed by defendant Octagon Plaza. The lease stated that the leased premises were “approximately 2,624 square feet” and occupied 23 percent of the shopping center. In addition to paying base rent, tenant was required to pay as additional rent 23 percent of the common area expenses within a specified time period after landlord provided tenant with a “reasonably detailed statement” of the actual expenses. After entering into the lease, plaintiff discovered that her unit occupied only 2,438 square feet, or 186 square feet less than stated in the lease and represented by defendant during their lease negotiations. The shopping center was also 965 square feet or 8.1 percent larger than represented by landlord. As a result, plaintiff’s share of the common area expenses should have been 19 percent rather than 23 percent. The size differences increased plaintiff’s rent and additional rent payments by more than $90,000 during the lease term. The lease contained exculpatory language that any statement of size was an approximation and agreed to by tenant as reasonable and that any payment based thereon was not subject to revision if the actual size were different. Plaintiff filed suit alleging claims including misrepresentation, breach of the implied covenant of good faith and fair dealing, and an accounting. The trial court sustained a demurrer without leave to amend on the misrepresentation and implied covenant claims, and after trial ruled that plaintiff failed to establish her claim for an accounting (or an unrelated claim for alleged violation of the Consumer Credit Reporting Agencies Act). The court of appeal reversed with respect to the claims for misrepresentation and an accounting.

Court Holdings:

  • With respect to the accounting claim, the court held that the implied covenant of good faith and fair dealing entitles tenant to review documentation supporting landlord’s statement of common area expenses. Because tenant’s share of the common area expenses is based on the actual expenses incurred by landlord, tenant is entitled to verify that the expenses listed in landlord’s statement were actually incurred and in the amounts shown.
  • However, the court emphasized that tenant’s right to review supporting documentation was limited. The court permitted landlord to decide whether to provide tenant with copies of the documents or allow tenant to review the originals. Moreover, the court rejected tenant’s request to audit landlord’s records in order to determine whether certain expenditures were necessary or appropriate. Tenant was only entitled to verify that the stated expenditures were actually incurred.
  • The court further held that tenant adequately pled a fraud claim based on landlord’s misrepresentations about the size of the leased premises and its percentage of the entire shopping center’s square footage. Tenant alleged that had she known the correct size, she would not have agreed to the base rent and share of common area expenses stated in the lease. Landlord’s use of the term “approximation” did not preclude liability for a material misrepresentation about size.
  • Tenant’s fraud claim was not barred by exculpatory language in the lease. Under California Civil Code section 1668, contractual provisions that would protect one against liability for his own fraud are against public policy. Thus, the lease provisions stating that the size approximations were reasonable, agreed upon, and not subject to revision regardless of actual size could not defeat a fraud claim.