Lease Agreement Fraud: Remedies for MN Businesses

What counts as fraud in a Minnesota commercial lease?

A false statement of a past or existing material fact, made to get the other side to sign, can be fraud. The speaker must have known it was false or stated it without knowing whether it was true, and the listener must have relied on it and lost money. The Minnesota Supreme Court set out the five elements in Hoyt Properties, Inc. v. Production Resource Group, L.L.C., 736 N.W.2d 313 (Minn. 2007), a case that began with a commercial office and warehouse lease:

1. a false representation of a past or existing material fact susceptible of knowledge;
2. made knowing it was false, or stated as of the speaker’s own knowledge without knowing whether it was true;
3. made to induce the other party to act;
4. that caused the other party to act in reliance; and
5. pecuniary damage resulting from the reliance.

Lease negotiations can produce this kind of fact statement: the square footage, the zoning, the condition of the roof, the existing co-tenants, a tenant’s revenue, and the guarantor’s net worth. Revenue numbers count. In Davis v. Re-Trac Manufacturing Corp., 149 N.W.2d 37 (Minn. 1967), the court held that “A false representation as to past or present income or profits is a false representation of a past or existing material fact.” The common-law fraudulent misrepresentation page covers each element in more depth.

Promises are different. In Valspar Refinish, Inc. v. Gaylord’s, Inc., 764 N.W.2d 359 (Minn. 2009), the court repeated that “a representation or expectation as to future acts is not a sufficient basis to support an action for fraud” merely because the promised event did not happen. The same passage adds that a false statement of present intention can be fraud if “the promisor had no intention to perform at the time the promise was made.” A landlord who promises a new anchor tenant is liable in fraud only if the record shows the landlord never meant to deliver one.

When does silence about the premises become fraud?

Silence is fraud in Minnesota only when the silent party had a duty to speak. In L & H Airco, Inc. v. Rapistan Corp., 446 N.W.2d 372 (Minn. 1989), the Minnesota Supreme Court stated the general rule that “one party to a transaction has no duty to disclose material facts to the other.”

The court then described when a duty arises: “A duty to disclose facts may exist under certain circumstances, such as when a confidential or fiduciary relationship exists between the parties or when disclosure would be necessary to clarify information already disclosed, which would otherwise be misleading.” The court also noted that one with “special knowledge of material facts to which the other party does not have access may have a duty to disclose these facts,” while observing that it had rarely addressed that theory.

The second circumstance can arise in leasing. A landlord who describes the building’s HVAC as recently serviced, while knowing a city inspector has ordered it replaced, has disclosed information that may need the rest of the story to avoid misleading the tenant. A tenant that hands over last year’s profit figures, knowing it lost its largest customer last month, raises the same question. The duty to disclose in contracts page addresses the disclosure rules beyond leases.

How does reliance work between experienced businesses?

The defrauded business must show that it actually relied on the statement and that its reliance was reasonable. In Hoyt, the Minnesota Supreme Court held that “Whether a party’s reliance is reasonable is ordinarily a fact question for the jury unless the record reflects a complete failure of proof,” and that “a party can reasonably rely on a representation unless the falsity of the representation is known or obvious to the listener.”

Experience alone does not defeat reliance. The landlord’s owner in Hoyt was an attorney with real estate experience, and the court still declined to call his reliance unreasonable as a matter of law. Two dissenting justices would have reached the opposite result on that record, so experience remains a fact the other side will press.

An investigation can defeat reliance. In Valspar, the court held: “When a party conducts an independent factual investigation before it enters into a commercial transaction, that party cannot later claim that it reasonably relied on the alleged misrepresentation.” The buyer there had tested the product itself. A thin inquiry does not have that effect. Davis held that where the listener “has not made an investigation adequate to disclose the falsity of the representation, the party whose misstatements have induced the act cannot escape liability by claiming that the other party ought not to have trusted him.”

For a tenant, this means a building inspection that tested the roof can cut against a later claim that the landlord lied about the roof. A walk-through that could not reveal the problem does not have that effect. The justifiable reliance standard page explains the reliance element in other transactions.

What happens to an entire-agreement or no-reliance clause when fraud is alleged?

An entire-agreement clause, even paired with a clause saying neither party relied on outside statements, does not by itself defeat a fraud claim in Minnesota. The Minnesota Court of Appeals held in Great Plains Educational Foundation, Inc. v. Student Loan Finance Corp., 954 N.W.2d 844 (Minn. Ct. App. 2020) that the presence of both clauses “does not as a matter of law bar a subsequent claim for fraudulent inducement of that settlement agreement based on alleged oral misrepresentations unless there are express terms in the settlement agreement that contradict the alleged oral misrepresentations.”

Great Plains involved a settlement agreement. The court relied on earlier Minnesota decisions, including one holding that a full integration clause “does not prevent proof of fraudulent representations by a party to the contract.” The court explained that a court may “find that reliance on an oral representation was unjustifiable as a matter of law only if the written contract provision explicitly stated a fact completely contradictory to the claimed misrepresentation.”

The practical consequence for a commercial lease is that the specific terms matter more than the boilerplate. If a broker said the space was 5,000 rentable square feet and the lease states 4,200, the written number contradicts the oral one. If the lease says nothing about square footage, the integration clause alone leaves reliance to the factfinder. I suggest reading the lease’s description of the premises, its “as is” clause, and its exhibits against every statement you relied on before you sign, because a written term that contradicts the statement can end the claim.

How do you choose between rescinding the lease and suing for damages?

A business induced by fraud to sign a lease must choose: undo the lease, or keep it and sue for damages. Great Plains stated the rule that a party “who has been induced to enter a contract by fraudulent misrepresentations may elect to rescind the contract or sue for damages,” and that a rescission “must be in toto,” meaning the whole lease, not the parts that turned out badly.

Rescission has to come quickly. In Gaertner v. Rees, 259 Minn. 299 (1961), a case over a gas station sold subject to a commercial lease, the Minnesota Supreme Court wrote: “The right to rescind must be exercised promptly upon discovery of the facts from which it arises for the reason that under the law it may be waived by continuing to treat the contract as a subsisting obligation.” In Bakke v. Keller, 19 N.W.2d 803 (Minn. 1945), the court added that the right “may be lost, after discovery of the fraud, by acts of affirmance, by acts or delay which evidence an abandonment of the right, or by acts of such a character, or delay so long, that to now assert the right would put the defendant to disadvantage.”

For a tenant, rescission means treating the whole lease as undone, including its term and its rent. For a landlord, it means treating the tenancy as undone. Each choice has a cost: rescission ends the business relationship, while a damages claim keeps the lease in force with its rent obligations. The undoing a signed contract after discovering fraud page walks through rescission in more detail.

When the fraud claim accrues turns on discovery of the facts. Under Minn. Stat. § 541.05, subd. 1, clause (6), an action “for relief on the ground of fraud” is one “in which case the cause of action shall not be deemed to have accrued until the discovery by the aggrieved party of the facts constituting the fraud.” In Bustad v. Bustad, 116 N.W.2d 552 (Minn. 1962), the Minnesota Supreme Court applied its earlier reading of that clause: “the facts constituting the fraud are deemed to have been discovered when, with reasonable diligence, they could and ought to have been discovered.” Clause (6) sits in subdivision 1, which provides that, except where the Uniform Commercial Code otherwise prescribes, “the following actions shall be commenced within six years,” so the six years run from that discovery. I suggest checking the current text of § 541.05 before relying on that period, because the legislature can amend it.

What damages can a defrauded landlord or tenant recover?

Minnesota measures fraud damages by what the defrauded party lost, not by what it was promised. In B.F. Goodrich Co. v. Mesabi Tire Co., 430 N.W.2d 180 (Minn. 1988), the Minnesota Supreme Court held that “the damages are the difference between the actual value of the property received and the price paid for the property, along with any special damages naturally and proximately caused by the fraud prior to its discovery, including expenses incurred in mitigating the damages.” The court added: “In this state we do not subscribe to the “benefit-of-the-bargain” rule.”

For a tenant, that comparison can be the rent paid against what the space was actually worth, and special damages may include build-out money spent before discovery if the fraud caused that spending. The court recognized an exception where the out-of-pocket measure would leave the loss uncompensated; in B.F. Goodrich, answering a certified question, the court held that “the trial court properly allowed plaintiff to recover its economic loss from the destruction of the business, measured by the value of the business before the misrepresentation (based on capitalization of past earnings) and the value after.” The calculating actual damages in fraud cases page shows how those figures are built.

Attorney fees are not part of fraud damages by default. The Minnesota Supreme Court’s decision in Hoang Minh Ly v. Nystrom, 615 N.W.2d 302 (Minn. 2000) restated that “each party bears his own attorney fees in the absence of a statutory or contractual exception.” A commercial lease may carry a prevailing-party fee clause, and its wording decides whether it reaches a fraud claim.

Punitive damages follow a separate procedure. Under Minn. Stat. § 549.191, “the complaint must not seek punitive damages.” The party must later move to amend, with one or more affidavits, and “if the court finds prima facie evidence in support of the motion, the court shall grant the moving party permission to amend” the pleadings to claim punitive damages. Under Minn. Stat. § 549.20, subd. 1, punitive damages “shall be allowed in civil actions only upon clear and convincing evidence that the acts of the defendant show deliberate disregard for the rights or safety of others.” Against a company, subdivision 2 permits punitive damages for an agent’s act only in listed situations, including where the agent “was employed in a managerial capacity with authority to establish policy and make planning level decisions.” The punitive damages for fraud page covers the standard further.

What can a landlord do when a tenant lied to get the lease?

A landlord defrauded by a tenant has the same two paths as a tenant, rescission or damages, and also the remedies its lease and Minnesota’s eviction statute provide. False financial statements and inflated revenue are statements of existing fact under Davis, so a tenant’s invented profit history can support a fraud claim against the tenant.

If the landlord keeps the lease, nonpayment is handled through eviction. Under Minn. Stat. § 504B.285, subd. 1, when a person holds over “contrary to the conditions or covenants of the lease or agreement under which that person holds, or after any rent becomes due according to the terms of such lease or agreement”, the person entitled to the premises may recover possession. In a nonpayment eviction, Minn. Stat. § 504B.291, subd. 1 provides that “unless the landlord has also sought to evict the tenant by alleging a material violation of the lease under section 504B.285, subdivision 5, the tenant may, at any time before possession has been delivered, redeem the tenancy and be restored to possession by paying to the landlord or bringing to court the amount of the rent that is in arrears, with interest, costs of the action, and an attorney’s fee not to exceed $5, and by performing any other covenants of the lease.” If the lease is “for a term of more than 20 years,” subdivision 2 provides that “the action may not begin until the landlord serves a written notice on the tenant and on all creditors with legal or equitable recorded liens on the property,” and it lets the tenant or such a creditor be restored to possession for a period after the landlord obtains possession. The commercial tenant eviction grounds page explains that process.

A tenant’s fraud may also reach the guaranty. If the owner personally guaranteed the lease based on the same false financial picture, the guarantor may be a second source of recovery. The enforcing a commercial lease guaranty page explains how guaranties are enforced in Minnesota.

The election rule from Great Plains applies here too. A landlord that evicts for unpaid rent and sues for the rent owed is enforcing the lease, which is a different claim from asking a court to undo it.

When does lease fraud become a crime in Minnesota?

Lease fraud becomes theft under Minnesota law when someone obtains property or services by intentionally deceiving another person. The deception must use a false representation known to be false, made with intent to defraud, and which does defraud the person to whom it is made. Minn. Stat. § 609.52, subd. 2, clause (3), covers whoever “obtains for the actor or another the possession, custody, or title to property of or performance of services by a third person by intentionally deceiving the third person with a false representation which is known to be false, made with intent to defraud, and which does defraud the person to whom it is made.”

Two features of that clause matter in lease disputes:

1. False promises. A false representation includes “a promise made with intent not to perform.” The statute adds: “Failure to perform is not evidence of intent not to perform unless corroborated by other substantial evidence.” Under that sentence, a tenant’s failure to pay rent is not, by itself, evidence that it never intended to pay.
2. Swindle. Clause (4) separately covers whoever “by swindling, whether by artifice, trick, device, or any other means, obtains property or services from another person.”

Clause (9), which addresses lessees who conceal or fail to return leased property, applies by its terms to one who “leases or rents personal property,” so it does not reach a lease of office or retail space. Sentencing scales with value. Subdivision 3, clause (1), authorizes “imprisonment for not more than 20 years or to payment of a fine of not more than $100,000, or both, if the property is a firearm, or the value of the property or services stolen is more than $35,000 and the conviction is for a violation of subdivision 2, clause (3), (4), (15), (16), or (19)”.

A criminal case can also put money back in the victim’s hands. Under Minn. Stat. § 611A.04, subd. 1, a crime victim “has the right to receive restitution as part of the disposition of a criminal charge” if the offender is convicted, and “An actual or prospective civil action involving the alleged crime shall not be used by the court as a basis to deny a victim’s right to obtain court-ordered restitution under this section.” Under subdivision 3, a restitution order “may be enforced by any person named in the order to receive the restitution, or by the Crime Victims Reimbursement Board in the same manner as a judgment in a civil action.”

When does the Consumer Fraud Act help a business party?

The Minnesota Consumer Fraud Act reaches misrepresentations made “in connection with the sale of any merchandise,” and its private damages remedies offer a business party limited help. Minn. Stat. § 325F.69, subd. 1 makes enjoinable “any fraud, unfair or unconscionable practice, false pretense, false promise, misrepresentation, misleading statement or deceptive practice, with the intent that others rely thereon in connection with the sale of any merchandise.” Minn. Stat. § 325F.68, subd. 2 defines merchandise to include “real estate,” and subdivision 4 defines a sale as “any sale, offer for sale, or attempt to sell any merchandise for any consideration.”

The direct consumer action does not fit a business. Minn. Stat. § 325F.70, subd. 3 gives a damages and fee remedy to “a consumer injured by a violation,” in a sale “for personal, family, household, or agricultural purposes,” and defines a consumer as “a natural person or family farmer.”

A business would instead rely on Minn. Stat. § 8.31, subd. 3a, which lets “any person injured by a violation” of the listed laws “recover damages, together with costs and disbursements, including costs of investigation and reasonable attorney’s fees.” In Ly, the buyer of a restaurant, which came with a lease of the restaurant space, was misled about its revenue. The Minnesota Supreme Court held that the Act covered that one-on-one purchase of a business “for operation and not resale,” and then held that subdivision 3a “applies only to those claimants who demonstrate that their cause of action benefits the public.” Because the misrepresentation was made only to the buyer, he recovered common-law fraud damages but no attorney fees. A business party suing under subdivision 3a over a misrepresentation made only to it faces the same public-benefit requirement.

Was Your Business Misled Into a Commercial Lease?

Fraud in a Minnesota commercial lease turns on a false statement of existing fact, reasonable reliance, and a measurable loss, and the defrauded party must choose promptly between undoing the lease and suing for damages. An entire-agreement clause does not end the claim unless the lease’s own terms contradict the statement. I advise Minnesota businesses on lease disputes as part of my contracts practice. If your business signed a lease based on statements that turned out to be false, email me at aaron@aaronhall.com with a brief description and the names of the parties. I can tell you which statements may support a claim, whether rescission is still available, and what the lease’s own terms do to the claim. I start an intake and conflict check before you send confidential documents, such as the lease itself.