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by Ron Davis
The seller of a North Dakota shopping center must pay dearly for a rental-income act of omission that the buyer discovered after completion of the sale.
The shopping center is Westgate Commons in West Fargo, and the 2003 sale of the property at first seemed straightforward. The two parties agreed to a sales price of $12.7 million, pending a detailed accounting of tenant rent obligations. Finding no apparent errors, the buyer accepted the terms and began operations at the center.
Some seven months after the sale, however, one of the tenants–an Old Navy store–discovered that it had been overpaying its rent. Its 2001 lease with the shopping center required Old Navy to pay minimum rent at $11.90 per square foot. In reality, the rate should have been $10.90 per square foot. So the Old Navy monthly rent dropped by about $20,000, and it decreased its monthly payments further to account for its past overpayment.
Upon learning of the reduction of Old Navy’s rent, the buyer sued the seller, alleging breach of contract, misrepresentation, and fraud. The gist of the complaint was that the previous owner failed to supply accurate information regarding the amount of rent Old Navy paid.
A North Dakota court ruled that the seller was liable for deceit, but not for breach of contract. The court also ruled, however, that the buyer failed to exercise ordinary care during the inspection period before the sale “because documents revealed that Old Navy was paying an incorrect amount of rent.” Finally, the court decided that Old Navy was negligent in duly failing to decrease its rent payments.
As a result of those findings, the court concluded that the seller was 70 percent at fault, the buyer was 15 percent at fault, and Old Navy was 15 percent at fault. The court then ordered the seller to pay the buyer $243,777.53 in damages.
On appeal of those rulings, the seller argued that the court erred in its finding of deceit. But the North Dakota Supreme Court agreed with the lower court, explaining, “It is reasonable to assume that the seller was well aware that Old Navy’s rental obligation had been lowered and neglected to apprise...the buyer of the overpayment because the error was in the seller’s favor. The additional rental income reflected on the rent roll increased the value of Westgate Commons. Although the seller complied with its contractual duties under the purchase agreement by providing all the relevant documents, its act of withholding knowledge of Old Navy’s actual rent obligation inured to its benefit.” (WFND, LLC v. Fargo Marc, LLC, 730 N.W.2d 841)
Decision: May 2007
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