The Law

Mistaken Assumption by Ron Davis Blame “laxity” for the big problems encountered by the purchasers of a specialty-coffee business at a Minnesota shopping center. The shopping center is located in the Minneapolis-St. Paul area, and the problems began soon after the purchasers of the coffee business began operations. The purchasers simply assumed the lease that the sellers of the business had previously executed with the shopping center. That lease, the buyers thought, gave them an exclusive right to operate the only coffee shop at the shopping center. But in assuming the lease, the new operators were lax in learning important details involved in the transition—despite at least two warnings. For example, the broker handling the sale warned them that “all information is provided by the seller…and the receiving party shall investigate and verify all information given.” And they signed a “broker services acknowledgement,” stating that they had been advised to do their own, independent investigation regarding due diligence. Finally, they signed several disclosure statements acknowledging that they were responsible for their own due diligence. They soon learned the folly of their failure to thoroughly investigate the purchase of the business. When later contemplating selling the coffee business, the purchasers found out from an attorney’s review of the lease that the lease terms did not prevent another coffee shop from moving into the shopping center. And they discovered that the condition of the assets of the business did not measure up to expectations. The purchasers sued the former owners of the business, claiming that the former owners had intentionally misrepresented the condition of the business’s assets, as well as the lease’s exclusivity provisions. They also pointed to a statement that the sellers provided, noting, “The coffee shop can only increase business because no other coffee shop can move into the whole complex because it is in the lease as an agreement….” A Minnesota court rejected those arguments and ruled in favor of the sellers of the coffee-shop business. The purchasers appealed. A Minnesota appellate court agreed with the lower court, explaining, “The purchasers of the business did not request a copy of the lease prior to closing, and they admit that the sellers did nothing to prevent them from obtaining the lease…. Furthermore, after the purchasers did receive copies of the lease and lease rider approximately six months after the closing, they only read ‘part of it.’ Because their laxity demonstrated the disregard of their rights, the lower court correctly determined that waiver had occurred here as an alternative theory favoring the sellers.” As for the purchasers’ charge that they received erroneous information as to the financial condition of the coffee shop, the court pointed out that “it was not justifiable, as a matter of law, for them to rely upon any misrepresentations on the profit-and-loss statements. They had the business’s tax returns in their possession as well as a statement of discretionary earnings which mirrored the tax returns’ numbers.” (Rasmussen v. R&N Dvorak, Inc., 2008 WL 1868314 [Minn.App.]) Decision: April 2008 Published: May 2008