We’ve written about many of the “elements” implicated by today’s blog posting, but don’t think we’ve ever illustrated them in the context of a specific lease provision. Among them are the concepts of “no-fault, risk shifting” and “not spending negotiating capital, effort, time or money” on protecting an insurance company (unless you happen to be working for one).
Take a look at the following provision. We don’t offer it as the “perfect” text for every lease or, for that matter, any lease. You’ll have to decide that for yourself. We offer it so that we don’t have to stop writing this posting when you reach the upcoming period.
None of Landlord or Landlord’s agents, partners, members, employees or any other person acting on behalf of Landlord will be liable for, and Tenant waives all claims against Landlord and Landlord’s agents, employees, members, directors, contractors, and those acting for or under Landlord for any and all loss, cost, liability, damage and expense (including attorney’s fees and disbursements), penalties or fines incurred in connection with, or arising out of, any damage to, or loss (by theft or otherwise) of, any of Tenant’s property or of the property of any other person, irrespective of the cause of such injury, damage or loss (including the acts or negligence of any other tenant or occupant of the Shopping Center or of any owners or occupants of adjacent or contiguous property) and whether occasioned by or from explosion, falling plaster, broken glass, electricity, smoke, wind, water, snow or ice being upon or coming through or from the street, roof, subsurface, skylight, trapdoor or windows, electric wiring, plumbing, dampness, water, gas, steam or other pipes or sewage, or the failure of the air conditioning or refrigeration system, or the breaking of any electric wire, the bursting, leaking or running of water from any tank, washstand, water closet, waste pipe, sprinkler system, radiator, or any other pipe in, above, upon or about the Leased Premises or the Building or the Shopping Center, or which may at any time hereafter be placed therein, or from any other cause whatsoever.
We’ve deliberately made that example “wordy’ because we don’t want anyone to miss the point. Obviously, this is a landlord-favorable clause. If you think the landlord has left any “openings,” just add more protections – expand the protections.
Is our example “fair”? No, it isn’t. But, don’t think we are saying that it is unfair to most tenants. We aren’t. So, to whom is it “unfair”? Try – the tenant’s insurance company. Under such a lease provision, it won’t be able to recoup its loss payments from the landlord. We’ll return to that because if, at first blush, you think you understood that as you were reading the provision, you may have forgotten about some other common lease provisions that you and we “know” will be in that same lease. Those would be the indemnification provision(s) and the waiver of subrogation provision.
Here’s a question not often thought about: “Why would (or, under what circumstances would) a landlord be liable for damage to its tenant’s property?” Of course, the parties could agree that the landlord would bear that risk, even if the landlord did nothing wrong. Is anyone ever going to see such an agreement? [Fill in your two letter answer here: .] The answer is that a landlord, just like anyone else, would be liable if (and only if) it did something wrong. “Something wrong” is a “tort” concept. There are a lot of definitions for that legal word, or more accurately, that legal concept. We’ve chose one that resonates with us: “A tort is a wrong that is committed by someone who is legally obligated to provide a certain amount of carefulness in behavior to another and that causes injury to that person, who may seek compensation in a civil suit for damages.” This includes what most people think of as “negligence.” It also includes deliberate acts done with the intention of doing harm or done with recklessness (where the actor should have known that harm would result). The duty breached might be a societal one, such as the obligation to act as a reasonable person would act (think: driving carefully). Or, it could be a duty imposed by a contract (think: lease), such as the obligation to repair a broken drainpipe.
Critical to understanding the circumstances under which a landlord would be liable for damage to its tenant’s property is understanding the kind of circumstances when the landlord would not be liable. For that, we’ll rely on an example. Imagine that a pipe near the ceiling breaks “out of the blue.” [Such as a plane falling out of the sky of that color.] The pipe serves more than just the tenant’s leased premises. Water gushes out and destroys some inventory and some store fixtures. Absent a specific lease provision, would the landlord be liable for “its” broken pipe? No, it wouldn’t. Nothing in our hypothetical example indicates that the landlord did anything wrong. We didn’t say that the landlord failed to properly maintain the pipe. We didn’t say that the landlord worked on the pipe three days earlier. We didn’t say that the landlord smacked the pipe with a sledgehammer. It just (plain) broke.
Now, you and we know that an aggrieved tenant will think otherwise. So, what happens? It files a claim against the landlord. If it is smart, it notifies its own property insurance carrier. If it isn’t smart, thinking that its claim history will come back later to kick it in the rear, it doesn’t. The landlord turns the claim over to its insurance carrier. The landlord’s carrier denies the claim. After all, its insured (the landlord) did nothing wrong. The tenant is upset. It goes back to its own carrier. If it gave timely notice to its own carrier, it gets to argue over the value of what was damaged and then gets a check. If it didn’t notify its carrier, it gets to argue whether the insurance company was prejudiced by reason of the delay. If it overcomes that threshold, it gets to argue over the value of the damaged property and then gets a check.
All of that remains true even if the lease says that the landlord is responsible for the landlord’s negligence or that the landlord will indemnify its tenant for breaches of the lease by the landlord. If the landlord didn’t do anything wrong, the landlord doesn’t pay.
None of that is to say that tenant will be happy with its landlord. After all, in today’s world “if something bad happens, it must be someone else’s fault.”
Let’s say the circumstances are a little different, for example that the pipe had been installed 14 months earlier. Based on that little twist, the tenant is now confident that something was wrong with the pipe from the get-go and that a reasonable landlord-person would have installed a pipe that wouldn’t break in just 14 months. So, now it gets to argue whether its landlord was at fault. Well, that’s true if it wants to argue with its landlord or the landlord’s insurance company. It doesn’t have to have such an argument with its own insurance company. Its property insurance coverage isn’t predicated on whether the installation was defective. It is “first party” coverage. It is pretty much “no-fault.” It pays.
OK, suppose the landlord was at fault. Doesn’t that make it simple to collect from the landlord’s carrier? No. Why? Was the landlord entirely at fault? Could the tenant have damaged the pipe by stacking its goods too high or when working on adjacent lighting fixtures? Let’s argue about that with the landlord (through its insurance carrier). OK, let’s say the landlord bore the entire fault. Is that the end of our story? No. Why?
How much was the damaged property worth? Is the landlord obligated to pay as if the fixtures were new or for new ones? What about the inventory? That’s pretty simple, isn’t it? Here are the invoices. Wait a minute; is the landlord liable for the cost of those goods if they were obsolete? Were they under the broken pipe at the time of the break or did they “walk” there on their own during the deluge? Could a reasonable tenant have done something to minimize the damage? Those are questions that can be raised between the tenant and its landlord (again, though the landlord’s carrier). They needn’t be raised between the tenant and its own carrier. That insurance is (essentially) “no-fault” coverage.
So, look back at the sample lease provision way, way above. What is its underlying concept? Basically it says to a tenant: “You’ll be much happier leaving the landlord out of the loop. Carry you own property insurance and get a check from your own carrier. That’s what the premiums are for. After all, the more likely scenario is that you, through an employee, will cause damage and you’re going to want to have property insurance anyway.” [Ruminations would be pleased to argue, “off-line,” with readers who say, “But, we self-insure.” Just contact us off-line.]
Now, setting aside all pre-conceived notions, ask yourself what really is happening when the suggested risk-shifting text is modified by adding, “except to the extent such damage is caused by the negligence or wrongful acts of Landlord or by Landlord’s breach of this Lease.” Why have the clause in the first place? Isn’t that the law absent an agreement to the contrary between the parties? Ruminations understands the moralist insistence on adding something like: “excluding, however, if any of the foregoing results from the gross negligence or willful misconduct of Landlord or Landlord’s, agents, employees, members, directors, contractors, or those acting for or under Landlord.” For all of the practical reasons elaborated upon above, we thing such an emendation is inappropriate, but we understand the emotional appeal of such a limitation.
A fair question would be: “Doesn’t the lease already say that each party waives all claims against the other for any damage to property that could have been covered by some kind of commercial property insurance”? [That’s a provision that ties into the “waiver of subrogation” provision. For our ranting on those provisions, just plug “waiver of subrogation” into the Ruminations search box and find the two-part blog posting on this subject.] Well, yes is does, but doesn’t another nearly ubiquitous lease provision say that the landlord will indemnify and hold the tenant harmless for wrongful acts done by the landlord (and certain others)? Yes, it does. Which one controls? With a clause such as the example we’ve given, no one has to figure out that answer.
Given the issues that can arise when a tenant’s property is damaged (or missing), and the ease by which a tenant can successively prosecute a claim against its own insurance provider (regardless of why or how the property was damaged or why it was missing), we think the omnibus lease provision trotted out as an example makes good sense.
Can we sum up today’s posting? Yes, by repeating our contention that lease negotiators should stop wasting time on protecting insurance companies who have agreed to bear the risk of loss in return for receiving premium payments. Think about that. If you do, you’ll realize that there are other such situations where a lot of time and money is spent with the same effective goal – protecting an insurance carrier. At nearly 2,000 words to this point, we’ve chosen to leave it at that.