Shopping Center Leases: Exempting The Landlord From Liability

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1. An Example of an Exculpation Clause: The AIR Lease

The AIR Commercial Real Estate Association’s leases include a paragraph entitled “Exemptions of Lessor and Its Agents From Liability.” This exculpation clause reads as follows:
“Notwithstanding the negligence or breach of this Lease by Lessor or its agents, neither Lessor nor its agents shall be liable under any circumstances for: (i) injury or damage to the person or goods, wares, merchandise or other property of Lessee, Lessee’s employees, contractors, invitees, customers, or any other person in or about the Premises, whether such damage or injury is caused by or results from fire, steam, electricity, gas, water or rain, indoor air quality, the presence of mold or from the breakage, leakage, obstruction or other defects of pipes, fire sprinklers, wires, appliances, plumbing, HVAC or lighting fixtures, or from any other sources of places, (ii) any damages arising from any act or neglect of any other tenant of Lessor or from the failure of Lessor or its agents to enforce the provisions of any other lease in the Project, or (iii) injury to Lessee’s ...
... business or for any loss of income of profit therefrom. Instead, it is intended that Lessee’s sole recourse in the event of such damages or injury be to file a claim on the insurance policy(ies) that Lessee is required to maintain pursuant to the provisions of paragraph 8.

AIR Leases are commonly used in Los Angeles and Southern California, especially for industrial and retail properties.

2. Principles Governing Exemptions from Liability

The California Court of Appeals recently reviewed the governing principles regarding exemptions from liability in a case entitled Frittelli, Inc. v. 350 North Canon Drive, LP out of the Los Angeles Superior Court. The court noted several principles:
• The tenant to a commercial lease may agree to limit the scope of the covenant of quiet enjoyment, whether express or implied, as well as the implied covenant of fair dealing.
• Courts have affirmed lease terms that exempted the landlord from liability arising from conduct by the landlord, neighboring tenants, as well as lease terms that limited the tenant’s remedies for breach of the covenant of quiet enjoyment.
• As for exemptions that purport to shield the lessor (landlord) from liability for negligence, the exemption is subject to the public policy disfavoring attempts by contract to limit liability for future torts.
• California Civil Code section 1668 finds contracts “which have for their object, directly or indirectly, to exempt anyone from responsibility for his or her own fraud, or willful injury to the person or property of another, or violation of law, whether willful or negligent, are against the policy of the law.”
• The statute invalidates contracts that purport to exempt an individual or entity from liability for future intentional wrongs and gross negligence.
• The statute also prohibits contractual releases of future liability for ordinary negligence when the ‘public interest’ is involved or a statute expressly forbids it.
• Exculpatory clauses are strictly construed against the person relying on them.
• However, when the parties knowingly bargain for the protection at issue, the protection should be afforded.

3. The Facts And Allegations In Frittelli, Inc. v. 350 North Canon Drive, LP
In the Frittelli case, the tenant Frittelli leased a retail space in Beverly Hills from the landlord in order to operate a gourmet doughnut shop pursuant to a “Standard Retail/Multi-Tenant Lease—Net”. In September 2008 the landlord began renovations to the shopping center. During the renovations the landlord arranged for temporary signs, daily cleaning to address the dust and rent concessions to the tenants. In April 2009 the landlord began unlawful detainer eviction proceedings against Frittelli, who countered with an action for breach of the lease, breach of the implied covenant of quiet enjoyment (Civil Code section 1927), negligence and rescission. The trial court granted summary judgment to the landlord and the ruling was appealed to the court of appeals.

Frittelli’s complaint alleged that the business was successful until September 2008, when the landlord began the renovations of the shopping center. The scaffolding, noise, dirt and delays “completely destroyed Frittelli’s business.”

Specifically, the tenant alleged that the landlord’s failure to exercise reasonable care in remodeling the shopping center contravened the express covenant of quiet enjoyment within the lease and the implied covenant of good faith and fair dealing. This misconduct was alleged to be “grossly negligent and/or negligent.” With regard to the claim for rescission, the complaint alleged that the landlord’s breach was “so material and complete” that Frittelli was entitled to rescind the lease and recover its lease payments and all damages.

The lease included the exculpation clause set forth above.

4. The Court of Appeals Holding
The California Court of Appeals examined whether the exculpation clause exempted the landlord from liability for breach of the lease, breach of the implied covenant of quiet enjoyment rescission and negligence. The Court of Appeals agreed with the trial court that the exculpation clause barred the tenant’s claims as a matter of law.

The court pointed out that this was a “net lease” which “ordinarily signals that the parties intended to transfer from the lessor to the tenants the major burdens of ownership of real property over the life of the lease.” The tenant was also required to obtain and maintain various insurance policies and the lease provided that the tenant’s ‘sole recourse’ in the event of damages or injury was to file a claim on those insurance policies. The court concluded that the parties’ intent, as expressed in the agreement, was to exempt the lessor from liability for breach of the lease and ordinary negligence.

Lastly, the court notes that although the clause cannot exempt the landlord from ‘gross negligence’, the facts of this case showed that the landlord took several measures to mitigate the effects of the remodeling project. In light of the measures taken by the landlord, the landlord’s behavior did not demonstrate ‘want of even scant care’ or ‘an extreme departure from the ordinary standard of conduct’, the requirements of a claim for gross negligence. Therefore, both the trial court and the court of appeals found that summary judgment was properly granted for the landlord.

5. Conclusion
Real estate attorneys who represent landlords should make sure that the landlord’s lease includes a paragraph exempting the landlord from liability. However, when faced with an eviction or a failing business, tenants will grasp at every last straw available, including suing the landlord for being responsible for the demise of their business. The exculpation clause is intended to minimize or avoid the landlord’s risk and can be a powerful tool in doing just that.

Real estate law attorneys: Laine T. Wagenseller is the founder of Wagenseller Law Firm and specializes in real estate litigation in Southern California. The firm represents landlords, tenants and others in breach of lease and other lawsuits concerning real property. For more articles, visit Wagenseller Law Firm’s website at www.wagensellerlaw.com. You can contact Mr. Wagenseller at (213) 996-8338 or ltw@wagensellerlaw.com.