## Facts

- Italian Cowboy Partners, Ltd. and its principals leased a former restaurant space in a Dallas shopping center to operate a new restaurant.
- The premises were owned by Prudential and managed by the landlord’s agent, Prizm.
- During lease negotiations, the landlord’s property manager told the tenants the building was “practically new” and had “no problems.”
- The space previously had a persistent, severe sewer-gas odor that had affected the prior tenant; the property manager had prior knowledge of the odor.
- After execution of the lease and a personal guaranty, the tenants remodeled and opened the restaurant, then experienced the same persistent sewer-gas odor.
- Despite repair efforts with contractors and public authorities, the odor continued, harming operations; the tenants terminated the lease and vacated.
- The lease included an “entire agreement” clause and a clause stating the tenant acknowledged no representations or promises were made except as set forth in the lease.
- The tenants sued for fraudulent inducement and breach of the implied warranty of suitability, seeking rescission and damages.
- After a bench trial, the trial court found knowing misrepresentations, awarded rescission of the lease and guaranty, and granted damages and attorneys’ fees.
- The court of appeals reversed and rendered a take-nothing judgment, concluding the lease clauses negated reliance and barred fraud, and it ruled for the landlord on a counterclaim.
- The Texas Supreme Court granted review.

## Issues

1. Whether the lease’s merger/representation language clearly and unequivocally disclaimed reliance so as to negate the reliance element of fraudulent inducement as a matter of law.
2. Whether statements that the building was “practically new” and had “no problems” were actionable misrepresentations, supported by legally sufficient evidence of knowing falsity.
3. Whether a persistent sewer-gas odor constituted a latent defect breaching the implied warranty of suitability in a commercial lease, and whether rescission was an available remedy.

## Decision

- The Texas Supreme Court reversed the court of appeals’ take-nothing judgment and held the lease provisions did not clearly disclaim reliance and therefore did not bar a fraudulent inducement claim.
- The Court held the challenged assurances were actionable representations of fact in context, and there was legally sufficient evidence the property manager knew they were false.
- The Court rendered judgment for the tenant on rescission based on breach of the implied warranty of suitability.
- The Court remanded for further proceedings consistent with its opinion, including matters affected by its reinstatement of liability theories (such as damages and fee issues).
- A dissent would have enforced the contract language to preclude reliance in a negotiated commercial lease between sophisticated parties.

## Legal Principles

- A standard merger clause or general “no representations except in the contract” provision, without clear and unequivocal no-reliance language, does not bar a fraudulent inducement claim.
- Disclaiming that representations were made is distinct from disclaiming reliance on representations; negating fraud requires a specific disclaimer of reliance.
- Statements that might appear to be opinion can be actionable misrepresentations when made by a speaker with superior knowledge about undisclosed defects and presented as assurances of existing conditions.
- Texas commercial leases include an implied warranty of suitability at inception covering latent physical or structural defects in facilities vital to the intended use, unless the lease clearly allocates the risk to the tenant.
- Rescission is an available remedy for breach of the implied warranty of suitability when a latent defect makes the premises unsuitable and is not assigned to the tenant by the lease.

## Conclusion

The court held that ordinary entire-agreement and representation clauses did not clearly disclaim reliance and therefore did not defeat fraudulent inducement as a matter of law, and it further held the landlord breached the implied warranty of suitability by leasing a restaurant space with an undisclosed latent sewer-gas condition, warranting rescission.


Italian Cowboy Partners, Ltd. v. Prudential Ins. Co. of Am., 341 S.W.3d 323 (Tex. 2011)