Initial Lease Term—Not Renewals—Used to Determine Fraud Claim

Facts: The owner of a gas station signed a lease with a tenant. The tenant became a sublandlord when it signed a convenience store sublease for space at the gas station where a subtenant could operate its coffee shop. The sublease with the coffee shop subtenant was for a 10-year “initial term” with two five-year term renewals. The subtenant expressed concern that it would have to leave its space early if the sublandlord didn’t actually have a right to the space for the term of the sublease. In its sublease with the subtenant, the sublandlord guaranteed that it had the right to occupy the space for the length of the subtenant’s lease. At the end of the subtenant’s initial term of 10 years, the sublandlord announced that its lease with the owner was about to end, and that the subtenant would have to move out of the space. The subtenant claimed that by asking it to leave before it had a chance to exercise both its renewals (adding 10 years to the initial term), the sublandlord had induced it to enter into a lease that had been misrepresented. Among other claims, the subtenant sued the sublandlord for fraud and breach of the sublease.  

Decision: A Pennsylvania court ruled in favor of the sublandlord.

Reasoning: The court noted that the sublease had been split into an initial term of 10 years with two five-year renewal options, for a total of 20 years. The subtenant claimed that the sublandlord had fraudulently misrepresented that it was entitled to the rent out the space for the subtenant’s “entire lease term.” The tenant considered its lease to be for 20 years, and, therefore, the sublandlord—who had the right to only 10 years in the space—had fraudulently misrepresented that the subtenant could have the space for its entire lease term. But the sublandlord claimed that the subtenant’s lease was really for only 10 years, not 20, and so it had correctly represented that it could sublease the space to the subtenant for its entire lease. The court pointed out that the dispute arose out of the parties’ differing interpretations of the actual length of the subtenant’s lease. The court determined that the subtenant couldn’t count the additional 10 years in renewal options as part of the lease. Rather, the initial term of 10 years was the figure that should be used when determining whether the sublandlord had cut the lease short.

The court also pointed out that the language in the sublease unequivocally provided for an initial term of 10 years, with two five-year options to extend the lease provided that the sublandlord itself has a lease term to cover the applicable option period of 10 additional years. However, when the sublandlord wasn’t able to extend its own lease with the owner and didn’t itself have an extra 10 years in the space, it could no longer carry out its promise to the subtenant, all of which the subtenant had agreed to by signing its sublease.

• Shree Vallabh Krupa LLC v. Verma, April 2016