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LOCATION: 555 Capitol Mall, Suite 1230, Sacramento, CA 95814
PHONE: (916) 996-0400 | FAX: (916) 668-5760

Fraud at Lease Formation Leads to Rescission of Personal Guaranty

In Orozco v. WPV San Jose, LLC (6th Dist. Cal. App. H044014, June 19, 2019), plaintiff Paul Orozco opened Pauly’s Famous Franks N Fries in a San Jose shopping center named “The Plant,” which sold hot dogs and french fries. Before signing a 10-year commercial lease, he asked the leasing manager whether restaurants with competing concepts were being considered for the other spaces in the shopping center. The manager told him no. In reality the manager was negotiating a lease with Al’s Beef, a national franchise selling—you guessed it–hot dogs and french fries.

Orozco signed the lease without knowledge that Al’s was also leased space at The Plant. As is too often the case, Orozco did not fully read the lease agreement. The lease happened to contain a statement that the landlord had not made any promises about products offered by other tenants or future tenants. At the same time, Orozco signed a personal guaranty, which is common for new businesses leasing space that have few assets or little credit history.

Orozco’s restaurant was successful at first, but approximately six months later, Al’s opened two doors down. Orozco’s restaurant declined and ultimately closed just six months later.

Orozco filed a lawsuit, and at trial, a jury found that fraud occurred and awarded lost profit damages to Orozco. However, the trial court ruled that Orozco was not entitled to rescind the personal guaranty on the commercial lease.

On appeal, the appellate court overturned the trial court’s denial of rescission. Since Orozco had now prevailed on rescission, the appellate court found he is entitled to recover his attorney’s fees under the agreement.

In this case, Orozco was ultimately successful in proving his claims and getting out of the personal guaranty on the lease. However, it did not come without significant risk, time, and expense to get there. Orozco could not have known the landlord’s true, unspoken intentions when he misrepresented information to him; however, a careful review of the lease would have helped him up front. Finding the statement with “no promises” regarding other tenants could have at least prompted Orozco to get more information and ask questions up front before locking himself in.

While there are legal means to unravel business problems later, everyone benefits by spending the time going through their contracts and leases before signing.

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