Chickens, Eggs, And Waivers of Claims

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When a tenant’s property is ruined by rain coming through the roof of its leased space, what caused the damage? Was it the water or was it the landlord’s failure to repair the roof? That’s today’s issue to Ruminate about.

Right after a tenant moved into its space, it noticed the presence of water after what was called, “inclement weather.” We might have called it “rain.” So, it notified its landlord. Without delay, the landlord dispatched someone to investigate. His conclusion was the water was coming from an air conditioning unit. The tenant immediately called an independent HVAC repair company. Its conclusion was that the roof was leaking and the air conditioning unit was fine. The landlord did not make any roof repairs.

After that, each time it rained, water came into the space. After one rainstorm, only four months after the tenant moved in, so much water came in that there was damage to equipment, furniture, interior walls, and to over one million dollars (at retail) of inventory. At that time, the tenant again put its landlord on notice of the leaking roof, the damage caused, and the failure of the landlord to make repairs. The landlord had the roof inspected again. This time, its foreman determined that the water intrusion was the result of the building’s improperly constructed exterior and by something wrong with its downspout. Apparently, the landlord still did nothing, not even in response to repeated notices subsequently sent by its tenant every time water came into the space. A lawsuit followed.

The landlord’s prime defense was to argue that the following “Subrogation” provision in the lease served to release it from any liability for the damages being claimed:

30) SUBROGATION: Neither the Lessor nor the Lessee shall be liable to the other for the loss arising out of damage to or destruction of the Premises or the building or improvements of which the Premises are a part thereof, when such loss is caused by any of the perils which are or could be included within or are insured against by a standard form of fire insurance with extended coverage, including sprinkler leakage insurance, if any. All such claims for any and all loss, however caused, hereby are waived. Said absence of liability shall exist whether or not the damage or destruction is caused by the negligence of either Lessor or Lessee or by any of their respective agents, servants or employees. It is the intention and agreement of the Lessor and the Lessee that the rentals reserved by this Lease have been fixed in contemplation that each party shall fully provide his own insurance protection at his own expense, and that each party shall look to his respective agents, servants or employees. It is the intention and agreement of Lessor and the carriers involved shall not be entitled to subrogation under any circumstances against any party to this lease. Neither the Lessor nor the Lessee shall have any interest or claim in the other’s insurance policy or policies, or the proceeds thereof, unless specifically covered therein as a joint assured. [Italics, courtesy of the Court.]

The landlord read this provision to say that it had no responsibility for the damage to its tenant’s property because that damage was caused by water leakage, a peril that could be included within a standard form of fire insurance. Whether “could” means by way of an endorsement is something we’ll leave for insurance professionals to discuss, but the tenant agreed that rain-caused damage could be covered.

So, why wasn’t that the end of the dispute? After all, the landlord thought it had an “open and shut” defense, so much so that it asked a federal court to throw out the suit without delay. [More technically, it filed a Rule 12(b)(6) motion, the basis of which was that even if its tenant’s “facts” were true, by law, it has no claim for which relief could be granted.

Yes, as we related above, the tenant actually agreed that rain-caused damage could be insured against. But, according to the tenant, it wasn’t the rain that caused the damage. Instead, the damage was caused by the landlord’s deliberate failure to repair the roof. The lease had this to say about the landlord’s duty in that regard:

17) CONDITION AND UPKEEP OF PREMISES: . . . Lessor shall be responsible only to maintain the roof, foundations, and outside walls (not including doors and floors). . . . Lessor shall not be liable for any damages or loss in consequences of defects in the Premises causing leaks, stoppage of water, sewer or drains or any other defects about the building and Premises, unless it shall have failed to repair defects for which it is responsible within a reasonable time following written demand of Lessee to do so.[Again, the Court has highlighted a portion of the provision.]

Interestingly [to us], the court, in reconciling the possible overlap between section 30 of the lease [reproduced way above] and this section 17, concluded that section 30 “contemplates situations in which an unexpected occurrence, such as severe weather episodes, flooding, or a spontaneous fire caused by accident or negligence, results in damage to the Leased Premises.” By implication, section 30 did not cover “expected” circumstances, such as rain leaking into the space because of an unrepaired roof.

Using a sharp eye, the court also noted that the section 30 included the following words: “Such absence of liability shall exist whether or not the damage or destruction is caused by the negligence of either Lessor or Lessee or by any of their respective agents, servants or employees.” It focused on the word negligence. That meant that if the court found that the damage was caused by other than negligence, section 30 might not apply, a result the tenant was seeking. Imagine what the court would have said had the words read something like: “…whether or not the damage or destruction is caused by an act or omission of either Lessor or Lessee.”

But, was there really another way to look at what caused the damage? For that, the court focused on the more directly applicable provision in the lease, its section 17. After all, this section directly addressed “damages or losses” resulting from “defects” in the building. Had section 17 ended there, then it might not have mattered “why” the rain came into the space. But, it didn’t end there. The first part of section 17, its release or waiver part, is followed by a big “UNLESS.” If the landlord “failed to repair defects for which it is responsible within a reasonable time following written demand of” it tenant, then the very specific rain-caused losses would not be “forgiven.”

The court opinion from which today’s story comes does not tell us whether the “butler did it.” It was only a preliminary decision. That means the tenant was going to get its chance to show that its landlord got appropriate notices about the roof and failed to repair the roof within a reasonable time. What we have learned at this stage is still very important. Yes, without doubt the rain coming into the building damaged the tenant’s property. But, if the cause of the rain coming into the building was the landlord’s non-negligent breach of its duty to repair the roof, the broad language of the lease’s “subrogation” provision (section 30) would not take it off the hook. And, the carve-out for the landlord’s breach of duty in the lease’s rain damage-specific provision could make it liable.

Are there take-aways? Yes, there are probably a lot of them. Ruminations will take a crack at a few of them. First, this kind of damage is insurable even though a standard, unmodified commercial property insurance policy probably doesn’t afford such coverage. So, each party could have insured its own property to cover this very situation. If the business concept was to keep this kind of dispute out of the courts, then the lease should have clearly said so. We suggest text something like the following (or something more artfully written):

None of Landlord or Landlord’s agents, partners, members, employees or any other person acting at the direction or on behalf of Landlord (“Landlord Parties”) will be liable for, and Tenant waives all claims against each and all Landlord Parties for any and all loss, cost, liability, damage and expense (including attorney’s fees and disbursements), penalties, and fines incurred in connection with, or arising out of damage to, or loss (by fire, theft or otherwise) of, any of Tenant’s property irrespective of the cause of such injury, damage or loss (including the acts or negligence of any 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 [Optional: , 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].

Basically, assuming that each party is or should be responsible for insuring its own property (and we think they should be), then defects or shortcomings in these kinds of lease provisions serve to benefit insurance carriers, not the lease’s parties. Let’s stop writing leases to protect insurance companies. The premiums being paid cover losses like these. [We’ve written a lot about this in the past. For a start, click: HERE.]

Second, didn’t someone ask themselves whether sections 17 and 30 were internally consistent? Let’s take a look at our form leases with that in mind. It isn’t unusual to see release or waiver language distributed throughout our leases. Even if a real nice job has been done, we have two suggestions? One is that perhaps it is time for us to send our form lease out to be critically reviewed by a third set of eyes. It may have been tightly crafted when first promulgated (though, in reality, we doubt it), but it likely subsequently has been modified by the same committee that designed the camel. Our other suggestion is that those negotiating leases should carefully re-read their own forms to understand what is really in the document. Too often, especially at the last moment, we add a few words in to a single lease provision without realizing that another of the lease’s provision is now in conflict with what we’ve done or that we’ve created an ambiguity.

Our last suggestion is fix the roof right away. Had the landlord done so, as was its responsibility, there would have been no damage, no law suit, and no anger (and no source of a blog posting). Whatever the legal cause of damage might have been, the rain or the default, how much simpler and less expensive it would have been had the roof been repaired? And, even if the repairs did not immediately stop leaks (as is often the case), the landlord would have been honoring its obligation (provided it kept trying to “find” the leak or leaks”).

[Oh, if you want to read the court’s decision, that can be done by clicking: HERE.]

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Comments

  1. RLGunn Associates LLC says:

    There are some landlords that give landlords bad names. Cudo’s to his lawyer for finding the landlord something to hang his hat on but, that will make the tenant less likely to want to rent from this landlord. It’s not worth it to be at the particular location when you have to deal with this garbage.

  2. Tim Scott says:

    As a general matter, it’s right for each party to insure its own business. But, that best applies when each party is performing. Your landlord slanted clause guts any need or urgency for landlord to perform after it knows of specific risk/breach of its obligations arising solely from landlord’s failure/refusal, b/c landlord’s only downside is a tenant termination for breach (likely waived or delayed) – that would also cost tenant the substantial loss of all the goodwill of the location (a loss waived in the lease). Where Landlord repeatedly or willfully fails to perform its obligations, why should tenant bear the damages that it cannot avoid, and bear the burden to modify its insurance and pay the premium for extra coverage to anticipate landlord’s willful failure. You only potentially allow exceptions for gross negligence or willful misconduct, but isn’t a failure to even try to promptly secure the roof from known leaks, prima facia, either gross negligence or williful misconduct? On balance, I think you got reasonable risk allocation and business expectations wrong here.

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