Fraudulent Inducement Involving Developer Deed Restrictions

Texas Commercial Lease Deed Restrictions and Fraudulent Inducement

In a prior blog post, we discussed the general concept of deed restrictions used by developers to control uses of a property and preserve value. As mentioned there, commercial deed restrictions are very often enforceable and upheld by courts. An example of such a commercial deed restriction would be an exclusive right to sell chicken products at a certain shopping center. This exact deed restriction is the subject of pending litigation in the 471st District Court of Collin County, Texas.

In Raising Cane's Restaurants, L.L.C. v. Crossings at Hobart-I, LLC et al, Raising Cane’s entered into a lease with the Crossings at Hobart shopping center. Unbeknownst to Raising Cane’s, many years before the Raising Cane’s lease was negotiated, another tenant, McDonald’s, was given the exclusive right to sell chicken products at the shopping center. As it would be abundantly clear to any landlord, the sole purpose of Raising Cane’s leasing any property in a shopping center would be to sell chicken products. Raising Cane’s would have never entered into a Lease and spent the time developing its business had it known it would not be able to sell chicken products. As a result, Raising Cane’s is suing the shopping center alleging fraudulent inducement, seeking to have the lease voided and be paid damages for the funds already spent developing the leased premises.

Fraudulent inducement in Texas is a claim similar to common-law fraud. The plaintiff must prove:

1) The defendant made a factual representation;
2) That representation was made with knowledge of its falsity or asserted without knowledge of its truth;
3) The defendant made said representation with the intention that the plaintiff should rely on or act upon the misrepresentation;
4) The plaintiff relied on the misrepresentation; and
5) The plaintiff’s reliance on the misrepresentation caused injury.

It is true that there was a responsibility on Raising Cane’s to perform due diligence and conduct a title search. However, if it is proven that Crossing at Hobart was fully aware of the negative deed restriction and did not disclose this to Raising Cane’s, then Raising Cane’s may see a substantial recovery in the pending lawsuit. If the court rules in favor of Raising Cane’s, this case may present another option for tenants and buyers who unknowingly subject themselves to a commercial deed restriction that thwarts the very reason behind the purchase/lease itself. Should you find yourself confronted with a commercial deed restriction and believe there may have been some fraud in the inducement, it is prudent to consult with an experienced real estate attorney.

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