On August 8, 1994, First Hawaiian Bank notified Colony Surf Development that its consent for any leases of mortgaged property was required under various mortgage agreements between the Bank and Colony Surf Development. On November 15, 1994, the Bank and

Question

Colony Surf Development entered into a restructuring agreement, which consolidated and restructured Colony Surf Development's debt. Colony Surf began negotiations for JCI to lease the commercial space. Colony Surf Development was represented by its agent, Radomile, in those negotiations. Eventually, on April 27, 1995, Colony Surf Development and JCI entered into a ten-year lease. Radomile executed the lease on behalf of Colony Surf Development. Under the terms of the lease imposed by the Bank, JCI was required to construct, at its sole cost and expense, all interior improvements to the Commercial Space, the hard costs for which were not to be less than $500,000. The requirement was not disclosed to JCI, and the restructuring agreement with the Bank's requirements had not been recorded in the land records. JCI did put in $163,509.20 in improvements, but the Bank required more and claimed JCI was in breach. JCI filed suit for misrepresentation and asked that the lease be set aside. Colony Surf maintains that JCI was not entitled to rely on Radomile. What should the court decide? Is there a misrepresentation that allows the court to set aside the lease? Does it make any difference that the requirement on the expenditures was not public record?

Answer 1

Radomile knew that the Bank refused to consent to the prior Touchstone lease of the same commercial space for a similar ten-year term. This was evidenced by section 17.3 of the Agreement, to which Radomile was a signatory. Radomile also knew that under the agreement, the Bank would consent to a lease with a three-year term of the commercial space to Touchstone, but that it would not consent to a longer term or a term that lasted beyond October 31, 1997.
Radomile, then, had knowledge that JCI was entering the lease, agreeing to make improvements, upon the mistaken belief that it had received a ten-year term with an option to renew for another ten years. Hence, the court's finding that Radomile knew JCI was proceeding under a mistake was supported by substantial evidence. Thus, finding no. 25 is not clearly erroneous.

The final step in resolving the question of duty under § 551(2 )(e) rests on whether JCI would "reasonably expect" that Radomile would disclose an external agreement that might impact the ten-year lease. Radomile does not address the reasonable expectation element directly. However, under the Restatement § 551, "when [the defendant] knows that the [plaintiff] is unaware of the fact, could not easily discover it, would not dream of entering into the bargain if he knew and is relying upon the [defendant's] good faith and common honesty to disclose any such fact if it is true[,]" "the plaintiff is entitled to be compensated for the loss".