Our last posting brought out dozens of comments, representing a wide spectrum of views. Almost all responders noted the connection between letters of intent and the time it takes to get a deal done. Beyond that there was little consensus. So, we’ve had over 100 comments on that topic – getting the deal done faster – but no one yet has suggested a major reason. Ruminations has a suggestion – the people responsible for negotiating leases (especially) don’t seem to have a sense of urgency.
This week, we’re going to go back to “law,” hopefully in an interesting enough way so as to keep non-lawyers somewhat interested, but that’s far from certain. It’s even worse. In this posting, our goal is set the background for a future posting. That posting will share some thoughts about indemnification, waiver, and release clauses in leases and other contracts. In most cases, those provisions wouldn’t be needed if it weren’t for the law of torts. So, here we go.
In an estate for a term of years, the holder essentially become the property’s owner and has the right to exclusive possession, even against the property’s fee owner. Let’s translate that. A tenant under a lease with a fixed starting date and a fixed ending date has all of the rights and obligations of a property owner. At the end of the term, the fee owner gets the property back. It’s been a long time, if ever, since this kind of estate (which we’ll now start calling a “lease,” its more common label today) has been unattached to a set of contractual rights. In fact, today, a lease would be considered a pure contract but for the vestiges of the common law of property. That doesn’t mean that all branches of common law have lost their vitality when it comes to real property leases – tort law, for example.
There is (or was) an underlying principle of tort law that translated to the following. A landlord, having turned its entire property to a tenant, was not liable to anyone injured during the term of the lease. After all, it was the tenant, not the landlord, who “owned” the property during the term of the lease. It didn’t even matter if the injury causing condition existed at the time the tenant took the property over.
Where is Ruminations headed? After all, this blog is about Retail Real Estate Law, not tort law. Hang on. This is a key area driving how and why we agree on those releases, waivers, and indemnifications engraved into our leases, sometimes giving the parties what they bargained for and sometimes only the illusion of successful negotiation. Essentially, what these lease provisions do is “shift the risk.”
Here is a brief digression, but it should make a very important point. A lease is an agreement between the parties, and only the parties. When it say that a landlord (or a tenant) “shall not be responsible for injuries or other damages caused to the tenant or any other person whatsoever, etc., etc.” does that mean the delivery driver can’t successfully sue the landlord for an injury caused by the landlord? No, not unless the delivery driver signed the lease in her individual capacity. So, why do we do this? Perhaps the lease can shift such liability to the tenant by way of required indemnification (but only if enforceable under the circumstances and that jurisdiction’s law), but the landlord is going to be responsible to the delivery driver for the landlord’s culpable act. Look at your lease’s waiver and release clauses and ask yourself – “oh yeah?”
Historically, there were exceptions to this general rule of no liability. Today, they have been expanded to cover a number of intuitive and less than intuitive fact patterns. One is rooted in “fraud.” A landlord is liable to its tenant and others if it knew or should have known of a concealed, unreasonably dangerous condition at the premises when possession was turned over to its tenant. This is only a duty to disclose, not a duty to investigate or repair.
Along the same lines, a landlord might have defectively designed a building component or may have defectively repaired something. In such cases, its tenant (and, in fact, a buyer of the property) might have a claim against the landlord for injuries arising out of the landlord’s lack of reasonable care, at least up to the time the tenant (or buyer) discovered the defect or to the point in time when it “should have.” As to third parties (think innocent bystanders), the landlord would remain liable. (And that’s why property sellers should consider what kind of liability insurance to keep in place after a sale.)
Another exception has to do with injuries to people and things “off the property itself.” The landlord remains just as responsible to these people as if there were no lease, though the tenant might share in that responsibility even if not by way of indemnification. This exposure doesn’t go to conditions first arising after the lease terms starts but, hear this, a landlord can be liable to outsiders for dangerous things it knew (or should have known) its tenant might do if the landlord agreed to let it be done and didn’t take reasonable protections to protect the outsiders.
A landlord might make repairs to the premises even though it had no obligation to do so. Until its tenant notices a defective repair or has sufficient time, in the eyes of a reasonable person, to discover a dangerous defect, its landlord might be responsible for injuries caused by the defective (e.g., negligent repair). That isn’t universally true, but it will be.
A statute might be the basis for a landlord’s liability.
Another basis for landlord liability is very relevant to retail properties. Case law holds landlords liable for injuries to customers and other invitees of its tenants for conditions, existing at the time of delivery of the premises, if the landlord failed to inspect for and fix them before turnover. That pertains to the “public” part of the leased premises. Remember, we’re not just talking about common areas.
Speaking of common areas, landlords remain liable to people injured in common areas. So, as to those areas, the basic duty under tort law applies – you have to act in a way that doesn’t create an unreasonable risk of harm to others. And, because this involves an invitation to the commercial public, it includes the duty to inspect, warn, and repair, at least with respect to areas open to the public and to places where one can reasonably expect the public to enter.
Though this was not historically true, in today’s world if a landlord is contractually obligated to make repairs, injured third parties foreseeably expected to be at risk by reason of the landlord’s failure to make such a repair can successfully recover from the landlord for injuries sustained. The limits of such liability parallel the contractual obligation. So, if a landlord isn’t contractually obligated to inspect certain premises, there is no contractual obligation to inspect them and an injured third party won’t be able to “camp on” to the lease and chase the landlord. They will need to find some other tort theory.
The Restatement (Third) of Torts has synthesized these various theories, and law buffs would be gratified by searching for the formulation it has reached. Caution is in order, however. Restatement (Third) isn’t always a “restatement.” Often it is predicting (or pulling people toward) where the law is going.
If the reader has absorbed all or most of this, hold on to your memory because, as told above, Ruminations will build on this in a forthcoming blog posting about drafting lease and other contract risk-shifting provisions.