by Randy Johnston
Contracts typically include what’s called a merger clause. The clause says that all the parties’ agreements are included in the contract and that neither of the parties made any representations outside the contract. But a foul odor put this principle to the test before the Texas Supreme Court.
The case arose when a couple of restauranteurs asked a landlord about leasing a building to open a new restaurant. The landlord told them that the building was brand new, was perfect and that there had never been any problems with it. Based on these representations, the restauranteurs signed a contract to lease the building.
But there was a problem with the building. The building had housed a restaurant before. That restaurant had moved on because a “horrible” and “ungodly” smell emanated from the bathrooms. The earlier restaurant had to move because no one could make the smell go away.
A week before the new restaurant was scheduled to open, the restauranteurs noticed a sewer gas odor. They went ahead and opened the restaurant, hoping that the smell would soon be eliminated. But the smell persisted. The restaurant didn’t attract many customers because of the smell. The city even shut the restaurant down briefly because of the smell.
One evening, the former manager of the old restaurant came to visit the new restaurant. Upon using the restroom, she found that the old smell was still there. While she was in the restaurant, one of the new restauranteurs introduced herself-and learned that the odor problem was not a new one.
The new restauranteurs closed down the restaurant and sued the landlord. The landlord defended by pointing to the merger agreement, stating that even if the landlord had lied about the odor, the restauranteurs agreed in the contract that the landlord hadn’t made any representations outside the contract.
The Texas Supreme Court didn’t buy that argument. The Court pointed out that the reason for merger clauses is to make sure all the parties’ agreements are in a contract, not to allow fraudulent statements to go unremedied. To insulate a party from a claim of fraudulent misrepresentation, a merger clause must also state that if there were representations made outside the contract, the parties did not rely on them.
Thus, it may be possible to contract in such a way as to exclude fraud as a ground for setting aside a lease, but not in this case. The lease signed by the landlord and the restauranteurs contained only the usual merger clause. It did not say that the parties did not rely on any representations outside the lease. Therefore, the restauranteurs were entitled to walk away from the landlord’s smelly building.