Wear And Tear Are Not Boilerplate Words

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Leases commonly assign maintenance, repair, and replacement liabilities to one party or the other, as they should. Just as commonly, as to items for which the landlord takes responsibility, leases deal with the consequences of a repair or replacement needed because of something the tenant has done wrong. In some cases, the responsibility for doing the work shifts to the tenant; in others, the landlord still has to do the work, but the tenant has to pay for that work.

This is a good place to make a few points about the relatively simple observations made thus far. So, before proceeding further, here are some thoughts. First, a key point that a lease needs to cover are these three responsibilities: maintenance, repair, and replacement. They do not have to be assigned as if they were co-joined obligations. A party can be responsible for doing one, two, or all three. Second, the party that does the work doesn’t have to be the party that pays for the work. Simply stated, “who does the work” and “who pays for the work” are separate concepts and must both be described in the lease. [Here is an old blog posting that expands on that thought: CLICK HERE:] Third, there are some kinds of work, usually major things, that a landlord should always do even if necessitated by misuse of the property by the tenant. By example, when it comes to a roof repair or replacement or a structural repair, the landlord has a greater interest in how the work is done than does a tenant without an investment interest in the property. Of course, there are some exceptions, such as where the tenant is sophisticated, technically competent, and generally reliable. Fourth, a lease should establish what “the tenant did something wrong” means.

Today, we’ll illustrate that last point by looking at an unpublished California Court of Appeals decision of July 25, 2018, one that can be seen by clicking: HERE.

Here’s the “short” story. A fitness center tenant leased retail space and converted that space to a gym with, among other amenities, an indoor pool. The pool was ventilated utilizing rooftop HVAC. In addition, the existing rooftop units were moved, and skylights were installed. This work affected less than 5% of the roof’s surface. Finally, the tenant replaced the entire roof membrane.

Ten years later, a new property owner-landlord, as part of its pre-closing due diligence investigation, inspected the roof and concluded it was “in bad shape.” The plywood roof deck “had rotted through and was a fall-through hazard.” The following year it asked the tenant to repair the roof but was rebuffed with the response that the lease imposed that burden on the landlord.

So, it’s time to look at just what the lease said. The landlord’s (relevant) obligations read as follows:

Landlord’s Obligations. Subject to the foregoing, Landlord shall keep, repair and maintain in good and tenantable condition and repair . . . the roof, roof membrane, exterior walls, structural parts and structural floor. . . . Tenant shall reimburse Landlord for Tenant’s Pro Rata Share of all costs and expenses incurred by Landlord pursuant to this Section 10.2.

Even though that provision seemed absolute on its face, the immediately prior lease section shifted responsibility under certain circumstances by saying:

Tenant’s Obligations. . . . Tenant shall also be responsible for the repair of any and all damage to the Premises and/or the Shopping Center caused by any act of Tenant or its employees, agents or contractors or any repairs necessitated by alterations, additions or improvements made by or on behalf of Tenant.

[Ruminations will ramble enough today without describing a sub-dispute about whether “improvements” in the text immediately included the “Tenant Improvements.” That was a defined term that included the tenant-installed pool. Fortunately, the resolution of that sub-dispute had no effect on who was responsible for replacing the roof.]

Before any reader thinks too deeply or too long about the quality of the work initially done by the tenant when adapting the space to be a fitness center, don’t bother. Had there been no indoor pool, the roof would not have rotted. Further, nothing in the court’s decision suggests that the ventilation system was inadequately designed or improperly operated.

With that in mind, let’s ask ourselves what part of the lease’s “Tenant’s Obligations” did the landlord argue caused the roof damage? Yes, it was the indoor pool. The landlord’s position was that the repair was “necessitated by … improvements [the pool] made by or on behalf of Tenant.”

As Ruminations has written many times, perhaps too many times, courts refuse to look at an agreement’s provisions in isolation. Instead, they look at (and we should look at) every provision within the context of the entire document.  [In California, this rule of construction is actually codified in Civ. Code. Section 1641: “The whole of a contract is to be taken together, so as to give effect to every part, if reasonably practicable, each clause helping interpret the other.”]

That principle gives us a reason to describe the two additional sections of the lease under the overall chapter titled: “Maintenance, Repairs, Alterations.” They are:

[At the end of the lease’s term, the tenant was required to] “surrender the Premises to Landlord in good and broom clean condition, excepting ordinary wear and tear and damage caused by fire or other casualty.”

[The tenant could not make] “any repair or alteration which affects . . . the exterior walls or roof of the Premises” [without the landlord’s prior written consent, such consent not to be unreasonably withheld].

Reading all four (indented, cited) lease provisions together, here’s what comes out. If the tenant did something to damage the roof, it had to repair the roof. Otherwise, the landlord had to repair the roof.

So, did the tenant do something that damaged the roof that caused the plywood roof deck to rot? There was no disagreement that humidity within the indoor pool area was what caused the rot. The landlord argued that since the pool was an improvement installed by the tenant, the tenant had to repair the roof. It pointed to the lease provision that required the tenant to make: “repairs necessitated by alterations, additions or improvements made by or on behalf of Tenant.” The tenant responded that the pool, itself, did not cause the roof damage. Instead, it was normal use of that pool that caused “ordinary wear and tear” to the roof.

So, that’s where the mundane, abundantly common phraseology, “ordinary wear and tear” rears its head and underlies today’s blog posting. They are words we just rubber stamp into our documents without thinking about the “exceptions,” those attributes of a deal that aren’t “ordinary,” such as having an indoor pool.

Before we drill down to what “ordinary wear and tear” means and get to our conclusion, we feel obligated to reinforce that all too forgotten concept. We’re talking about the need to read lease provisions (and those in other agreements) in context. In that light, when the landlord pointed out that the words, “ordinary wear and tear,” did not appear other than in the lease’s “surrender” or “restoration” provision, the court said something like: “True, but it was implied by the other parts of the very same chapter or article, namely the surrender provision.

What is ordinary wear and tear? Here’s what the court thought:

Because the term is not defined in the lease, we construe it in its ordinary and popular sense. … The term is common in real property leases—“ordinary wear and tear contemplates that deterioration will occur by reason of time and use despite ordinary care for its preservation.” … Damage that is “attributable to the usual practice and custom of [a commercial lessee] in carrying out its business . . . constitute[s] ‘ordinary wear and tear.’” … For example, in [a prior decision], the commercial tenant was a beer distribution company. Conditions at the expiration of the lease attributable to normal beer distribution activities were deemed to be “‘ordinary wear and tear.’”

The lease expressly permitted installation and use of a pool. The pool (as an “improvement”) did not cause direct damage to the roof. It was the (permitted) use of an indoor pool that resulted in the need for roof replacement. That’s why, in a bold, italicized, large type subheading in its decision, the court wrote: “Roof deterioration over the pool reflected normal use of an indoor pool.

So, if you think the tenant should have replaced the roof at its own cost and expense, what went wrong? That’s simple, and something all too common. The landlord’s negotiator never thought about how the property would be used. She or he never thought about something uncommon in leased space – an indoor (or any) pool. Not every use is as a clothing store. In our minds, we need to “walk through” the leased space (in our minds) and tailor our leases to what we see. What are the implications of a bank having a hardened vault? How would a dance studio affect an adjacent ambulatory surgical center? Will the tenant install wiring above and beyond “ordinary,” a rat’s nest that will need to be removed at the end of the lease term? We all think about parking burden or noise levels, but what about the “unique” needs and uses engaged in by legitimate tenants?

Basically, in the context of “wear and tear,” the phrase requires us to ask “What is ordinary?” Are we thinking of “ordinary” in the context of “ordinary” businesses or are we thinking of “ordinary” in the context of the tenant’s particular business – in this case as a fitness club with an indoor pool?

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Comments

  1. Jeremy Deeken says:

    The terms “wet lease” and “dry lease” are typically used to describe personal property leases of aircraft, however I think the terms can be applied to distinguish the type of use that a restaurant or health center with an indoor pool might employ from a typical clothing store.

    The former use type results in certain environmental wear and tear issues that are not typical of the latter type of use. This distinction can have effects, not only on the landlord, but also neighboring tenants in the center. Too often the neighboring tenants are lax in addressing potential party wall issues upfront – such as water and sewage intrusion. Landlords typically seek to avoid any responsibility for party wall issues in the lease, leaving many unwary tenants to fight their offending neighbors with only the tools of statutory or common law.

    At the outset, while the lease negotiation is at hand and a prospective tenant’s leverage is at its zenith, it would be wise for them to take stock of its potential neighbors and seek a commitment from the landlord to assume some responsibility should worse come to worst.

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