Daily Development for Tuesday, December 23, 2003 by: Patrick A. Randolph, Jr. Elmer F. Pierson Professor of Law UMKC School of Law Of Counsel: Blackwell Sanders Peper Martin Kansas City, Missouri dirt@umkc.edu LANDLORD/TENANT; CHARACTERIZATION: Where the language of the agreement clearly shows an intent to create a landlord/tenant relationship, as opposed to a bailment, the contract may be conclusive of that relationship in evaluating the question of whether tenant may claim damages from landlord when objects on premises are damaged. Jewelers Mutual Insurance Company v. Firstar Bank Illinois, 792 N.E.2d 1 (Ill. App. 1 Dist. 2003). After more than $1 million worth of loose diamonds and fine jewelry were stolen from three safety deposit boxes that the defendant, Firstar Bank Illinois ("Firstar") rented to jewel dealers at one of its Chicago branches in the fall of 1996, plaintiff, Jewelers Mutual Insurance Company ("Jewelers"), a subrogee of Boxholders Annaco and Ringel, sued Firstar under theories of breach of contract and negligence. In connection with the rental of the safety deposit boxes from First Star, Annaco and Ringel each had signed a form contract that stated: "8. Relationship defined, the relationship of the Bank and the Lessee being hereby agreed to be that of Landlord and Tenant, not as Bailee and Bailor." The contract further stated: (1) It is understood that said bank has no possession or custody of, nor control over, the contents of said safe and that the Lessee assumes all risks in connection with the depositing of such contents; that the sum above mentioned is for the rental of said safe alone, and that there shall be no liability on the part of said bank, for loss of, or injury to, the contents of said box from any cause whatever unless Lessee and said bank enter into a special agreement in writing to that effect, in which case such additional charges shall be made by said bank as the value of contents of said safe, and the liability assumed thereof may justify. The liability of said bank is limited to the exercise of ordinary care to prevent the opening of said safe by any person not authorized and such opening shall not be inferable from loss of any of its contents." Firstar moved for summary judgment based on the exculpatory language in the contract. The Trial Court granted Firstar's Motion for Summary Judgment noting that the exculpatory clause stated that the Bank would not be liable for the loss of the jewelry unless Annaco and Ringel had paid additional charges for a special agreement. The Trial Court also found, among other things, that the contract was not a lease of real property subject to the Landlord and Tenant Act (the "Act"). Jewelers appealed. The Appellate Court of Illinois found that by defining their relationship as landlord and tenant, the parties subjected their relationship to the Act. Because the Act invalidates exculpatory clauses that excuse a landlord from liability for his own negligence, the Court found that the exculpatory clause in the contract was unenforceable. The Court reasoned that if the parties defined their relationship by contract as that of landlord and tenant, then they intended to take advantage of the benefits conferred by the Act, along with the limitations imposed by the Act. The Court also noted that logical inference would negate an intent to exculpate the bank from its own negligence since the whole purpose of renting a safe deposit box is for reasons of security. The Bank argued that it never relinquished possession or control of its vaults that contained the box, so that a statute pertaining to the lease of real property did not apply. The court found this argument to be meritless in light of the bank's deliberate characterization of the arrangement of a lease. The court also discussed the possibility of characterizing the boxes as fixtures, and thus supported its conclusion defining the relationship as a real property relationship But the real emphasis was on the "landlord's" election to so characterize. Finally, the Court found the issue of whether a safety deposit box is real property or personalty was largely irrelevant. It noted that if the contract between the Bank and the renters of the boxes had not expressly defined their relationship as landlord and tenant, the law would require it to look at the nature of the relationship and define it as the law had defined such relationships in the past generally, in the case of safe deposit boxes, as bailor and bailee. Since the Act governed the relationship of the parties, the Court found that the exculpatory clause in the contract was unenforceable and reversed the grant of summary judgment. A strong dissent argued that the parties had not classified the agreement as one of landlord and tenant but had only attempted to negate bailment liability. The dissent analyzed the agreement as neither bailment nor landlord/tenant. Comment 1: Alert readers may say: "Back up a minute, here. An Illinois statute voids all provisions limiting negligence liability for landlords - even commercial landlords?" Yep. The statute doesn't limit its coverage to residential tenancies, and Illinois lawyers apparently live with it. So it does seem appropriate, therefore, that the bank be heisted on its own petard when it provided in form language in its safe deposit box agreements that the relationship shall be that of landlord/tenant. Comment 2: But was it wise to reach this conclusion by ruling generally that parties can self-characterize their property relationships? Generally, there is a public policy ingredient in the analysis of any property relationship. One such public policy consideration is the notion that society has an interest in the nature of property relationships, and therefore the courts, and not the parties ought to be defining what that relationship is. If the parties seek a relationship that is not consistent with the rights and responsibilities they have agreed upon, the remedy is to change the rights and responsibilities, not the label. We have seen this principle at work in many cases involving licenses, easements, leases, mortgages, and the like. Although the court concluded here that the party doing the characterizing gets the short end here, the principle that the parties can self characterize will eventually be exploited to reach results inconsistent with public policy in the future. Comment 3: The Illinois precedent, apparently, was loaded with case law characterizing a safe deposit box rental as a bailment. Why not find it to be that and separately analyze whether the exculpation from negligence was valid? Comment 4: Note that the dissent argues that, despite the precedent, a safe deposit agreement is neither fish nor fowl - neither bailment nor lease, and should be analyzed on completely separate grounds. The editor is sympathetic with that sort of reasoning in a vacuum, but not when there's a string of 10 cases or so fining that there's a bailment here. LANDLORD/TENANT; CHARACTERIZATION: Agreement between City and Transit Authority, by which City built and "conveyed" rapid transit facility to Authority for operation and maintenance, with a provision that the Authority would "reconvey" to the City when it ceased operations, did not amount to a "lease contract" under which City as landlord would not be liable for injuries caused by defective condition on premises under Authority's control, where agreement did not provide for payment of rent, City retained very limited maintenance responsibilities only over the landscaping, and City could perform capital improvements at the facility. Leonardi v. Chicago Transit Authority, (Ill. App. 1 Dist. 2003). Plaintiff Maria Leonardi stepped into a large crack in the sidewalk at the Jefferson Park bus station and injured her right foot. Leonardi sued the Chicago Transit Authority ("CTA") and the City of Chicago ("City"), alleging defendants had negligently failed to maintain the sidewalks and curbs at the bus station. The City filed a motion for summary judgment, contending it has no duty to Leonardi because it had no management authority or control over the sidewalks at the Jefferson Park bus station. The Trial Court granted the City's motion. The City and the CTA entered into an agreement for the operation and maintenance of the Kennedy Rapid Transit Facility which includes the Jefferson Park bus station. According to the agreement, the City passed an Ordinance granting the CTA "the exclusive right and authority to establish, construct, reconstruct, maintain and operate the transit system for the local transportation of passengers within the City." The only portion of the transit facility over which the City retained any maintenance responsibilities was the landscaping. The CTA agreed to hold the City harmless for claims arising out of operation and maintenance of the facility and its appurtenances. Leonardi contended on appeal that despite the agreement, as owner of the property, the City retained sufficient control over the property to create a duty on the City's part to maintain the sidewalks. She cited 3-102A of the local governmental and governmental employees tort immunity act which states, in part, "(a) except as otherwise provided in this article, a local public entity has the duty to exercise ordinary care to maintain its property in a reasonably safe condition for the use and the exercise of ordinary care of people whom the entity intended and permitted to use the property in a manner in which and at such times as it was reasonable foreseeable that it would used, and shall not be liable for injury unless it is proven that it has actual or constructive notice of the existence of such condition that is not reasonably safe in a reasonably adequate time prior to an injury to have taken measures to remedy or protect against such condition." The Appellate Court of Illinois considered the ultimate question to be whether the City "actually exercised control over and was obligated to maintain" the sidewalks and curbs of the Jefferson Park bus station, thereby establishing the existence of a duty to Leonardi. The City argued that the agreement was a lease and therefore it was not responsible for injuries caused by a defective condition on the leased property under the tenant's control. Leonardi, on the other hand, characterized the agreement as a license to avoid the implications of landlord/tenant law. The Court concluded that the agreement did not fit squarely within the definition of either a license or a lease. As such the Court found that the agreement was "a division of public duties" between public entities pursuant to legislative enactments. Because the CTA had total control over the facility, the City had no control over the sidewalk where Leonardi fell, and hence, no duty toward Leonardi. The Court affirmed because Leonardi could not establish the existence of a duty on the part of the City. Comment: The decision here, unlike that in Jewelers Mutual Insurance Company v. Firstar Bank Illinois, 792 N.E.2d 1 (Ill. App. 1 Dist. 2003) (reported under this heading), decided by a different panel of the same court, did not fall into the error of permitting the parties to self characterize. Further, it recognized that a perpetually unlimited conveyance of "all necessary rights" to operate comprehensively a transit facility, including the right to construct buildings, etc., lacks the normal "term transfer" characteristic of a lease, and is more like a conveyance of ownership subject to a condition subsequent. It is not clear why the court didn't conclude that in fact there was ownership conveyed, subject to a right to reconvey. Perhaps there is some unstated Constitutional reason or City Charter reason why this could not be a conveyance of ownership. The court said that the City retains the right to make capital improvements to the property transferred, but did not cite to any language that so provides and did not elaborate as to the conditions under which this would occur. So the author cannot comment on this aspect of the ruling. Certainly that right might tend to undercut the characterization of "all necessary rights" as something less than complete ownership. But was it wise to abandon the characterization process even here - to conclude that the agreement is neither a transfer of ownership nor a transfer of possession nor a license? The court said that there was no provision for rent, and thus there could be no lease. But a "term of years" normally does not require that rent be paid in order for it to be a valid leasehold estate, even though if the parties don't negate the existence of a rent obligation, one will be assumed. Even though, as the editor suggests above, the better characterization was as a conditional fee, the reason for this was not that there was no provision for rent, but rather that the conveyance was for an unlimited term, subject only to the obligation of the Authority to "reconvey" when it no longer chose to operate a transit activity. Once again, the well being of our property law requires that neither the parties nor the exigencies of a particular problem drive courts away from the characterization process, which embodies a great deal of public policy developed through hundreds of years of common law analysis. Readers are encouraged to respond to or criticize this posting. Items reported on DIRT and in the ABA publications related to it are for general information purposes only and should not be relied upon in the course of representation or in the forming of decisions in legal matters. The same is true of all commentary provided by contributors to the DIRT list. 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