LANDLORD TENANT/ LANDLORD’S DUTIES/ IMPLIED WARRANTYOF SUITABILITY; “AS IS” CLAUSE:”   An important split is developing in Texas on the question of the application of its unique implied warranty of suitability when the lease contains a clear “as is” clause.

Gym-N-I  Playgrounds, Inc. v.. Snider, 2005 Westlaw 240419 (2/3/2005)

This case signals a clear split in the Texas courts of appeal as to how “waivable” the implied warranty of suitability of commercial premises will be.  Specifically, what is the effect of an “as is” clause by which the tenant acknowledges the duty to inspect and accepts the building in its current condition?  There have already been several opinions in Texas courts, and they’re all over the map.  Perhaps this one will go up to the Texas Supreme Court to resolve the issues.  Unfortunately, as the editor notes below, the facts are not the best ones to support a thorough review.

Prior to leasing its 20,075 square foot building to Tenant, Landlord was informed by the local fire marshal that the threshold building size for mandatory fire sprinkler systems was 20,000 square feet..  The fire marshal recommended the installation of such a system but, according to the court, “did not require it because the building was only 75 square feet over the square-footage  threshold.”  Landlord thought about it, but did not install the sprinklers.

At the time of the conversation reported above, Landlord operated its own business in the building, but later sold the business and leased the building to Tenant.  The lease contained an “as is” clause with all the standard verbiage.  It stated that Landlord had made no representation as to “commercial suitability, physical condition, layout, footage, expenses, operation or any other matter affecting or relating to the premises and this agreement” except as expressly set forth, and that Tenant acknowledged it had received no such representation and that there were no express of implied warranties of any kind, including fitness and suitability.”  The clause was underlined and in all caps.

The lease also contained a holdover clause that stated that if the Tenant held over beyond lease term, it would be on a month to month lease “under the terms and provisions of this lease to the extent applicable. . . .”

The tenant did hold over, and during the holdover period the building burned to the ground.  The tenant sued for damages based upon the failure to provide a sprinkler system, which the tenant argued was gross negligence, a violation of the state Deceptive Trade Practices Act, and a breach of the implied warranty of suitability first recognized in the Texas Supreme Court decision in Davidow v. Group-Phase I, 747 S.W.2d 373 (Tex. 1988).

The court here relied heavily on a subsequent Texas decision, Prudential Ins. Co., of America v. Jefferson Assocs., Ltd. 896 S.W. 2d 156 (Texas 1995).  Prudential was not a leasing case, but a sale case, in which the court concluded that any implied warranty of suitability in the sale of real estate could be avoided by use of an “as is” clause.  The court here notes that, since Prudential, these clauses have been held applicable “in the context of causes of action based upon fraud, negligence, breach of duty, and the [Deceptive Trade Practices Act].”

The basic analysis in Prudential was based upon causation.  Although there might have been some breach of duty in transferring property containing undisclosed defects, this was not the actual cause of the plaintiff’s damages because there had been no reliance on the part of the plaintiff on the landlord’s express or implied misrepresentations about the quality of the property.

“Put another way, [Tenant’s] agreement to accept the premises “as is” effectively supercedes any fault of [Landlord’s].”

The court here pointed out that Davidow itself at least suggested that “as is” language in the lease would be relevant to determining whether there should be liability for breach of the implied warranty of suitability.  At that time, seven years before Prudential, the Davidow court did not specifically rely upon the causation analysis in discussing the effect of a waiver.   Here is the Davidow language:

“The existence of a breach of the implied warranty of suitability in commercial leases is usually a fact question to be determined from the particular circumstances of each case. Among the factors to be considered when determining whether there has been a breach of this warranty are: the nature of the defect; its effect on the tenant's use of the premises; the length of time the defect persisted; the age of the structure; the amount of the rent; the area in which the premises are located; whether the tenant waived the defects; and whether the defect resulted from any unusual or abnormal use by the tenant.”

One could certainly read this language to preclude the finding of an implied warranty in the face of an “as is” clause, whatever the analysis.  Another very important fact in this case was that the Tenant’s principles knew of the absence of the sprinklers and that there was a “fire code problem.”  Thus, the court sustained summary judgment for the defendant.

Unfortunately, this doesn’t end the matter for Texas jurisprudence.   The Davidow court, at another point, where it specifically stated the characteristics of the warranty it was creating, suggested a narrower range of waiver possibilities:

There is no valid reason to imply a warranty of habitability in residential leases and not in commercial leases. Although minor distinctions can be drawn between residential and commercial tenants, those differences do not justify limiting the warranty to residential leaseholds. Therefore, we hold there is an implied warranty of suitability by the landlord in a commercial lease that the premises are suitable for their intended commercial purpose. This warranty means that at the inception of the lease there are no latent defects in the facilities that are vital to the use of the premises for their intended commercial purpose and that these essential facilities will remain in a suitable condition. If, however, the parties to a lease expressly agree that the tenant will repair certain defects, then the provisions of the lease will control.” (Emphasis added)

In a footnote, the present court noted that several other Texas court of appeals districts have limited the reach of waivers in commercial suitability lease cases to express assumptions of risk by tenants:.

“We note that our holding today conflicts with holdings of our sister courts in Houston and Corpus Christi. See Parts Indus. Corp. v. A.V.A. Servs., Inc., 104 S.W.3d 671 (Tex.App.-Corpus Christi 2003, no pet.); Gober v. Wright, 838 S.W.2d 794 (Tex.App.-Houston [1st Dist.] 1992, writ denied). In Gober, which involved the lease of a commercial building and damages caused by a leaking roof, the Houston court stated that the supreme court "intended to except from the lessor's responsibility only those repairs the lessee willingly accepted as part of the bargain." Gober, 838 S.W.2d at 798. The court further stated that, "As a matter of law, the landlord's implied warranty of suitability for commercial purposes is limited only by those specific terms in a commercial lease whereby a tenant expressly agrees to repair certain defects." Id. The Corpus Christi court cited Gober for this same exact language in holding that a tenant who had not expressly agreed to repair the roof of a commerci
al rental property had not waived the implied warranty of suitability. Parts Indus., 104 S.W.3d at 680-81. We decline to interpret Davidow so narrowly.

So, the issue is far from resolved.  Stay tuned.

Comment 1: The facts to which the court alludes at the end of the opinion - that Tenant knew of the lack of sprinklers and of the fire code issue, may in fact take the case out from under Davidow entirely, as the “defects” were not “latent.”  See the language creating the Davidow warranty quoted above.  But perhaps because we had a code violation or because the “knowledge” of the tenants wasn’t as clear, the court apparently elected not to rely upon that analysis.

Comment 2: There are two diametrically opposed concepts here.  The first is that commercial tenants lack the  resources to go up against the landlord on the question of defects in a leased premises.  It is not so much a question of bargaining authority as one of understanding of the structure itself.  The landlord is in a far better position, most often, to know about problems with the building and, for that matter to remedy them.  This has led Texas courts to adopt, at least as a “default” interpretation, that the landlord should be viewed as warranting suitability.

But running counter to this analysis is the fact that commercial parties should be given  the ability to fashion whatever allocation of risk they elect, for a bargained price?  It is difficult to argue that, as a class, commercial tenants lack bargaining power as against commercial landlords.  Experience proves otherwise.  Tenants have lots of choices, and lease terms vary dramatically as both sides reach for their best deal, case by case.

Although it might be argued that commercial property purchasers typically undertake greater “due diligence” than tenants, and that cases like Prudential (which involved a sale) ought not to apply foursquare to leasing cases, the bottom line is that it’s a jungle out there and that’s just the way the American commercial marketplace wants it.  We’re used to it, and there is no reason for the courts to change the established customs, practices and expectations in order to pursue their own misinformed views of fairness or justice.  Commercial tenants have more than enough power to run to the legislature if they think they’re getting pushed around. We don’t have the same powerless victims that courts were seeking to protect with the implied warranty of habitability in housing.

Comment 3: Note that there are two aspects of the Davidow implied warranty.  The landlord has the duty to deliver the premises free of latent defects (that’s the aspect at issue here) and a continuing warranty that facilities “vital to the use of the premises for their intended commercial purpose . . . will remain in a suitable condition.”  (See quoted language above.)  The language stating that landlords and tenants can expressly allocate maintenance responsibilities follows directly this statement of the second duty.  Is this simply a statement pertaining only to the continuing duty?  It would appear to have nothing to do with the existence warranties against  latent defects at the outset.  Just stating the defect would make it “not latent” and therefore beyond the warranty, so it would be not necessary to transfer specific duties at the outset.  Certainly no one expected the tenant in this case to install the sprinklers, but rather to live with the risk.

So the pathway is open for the Texas Supreme Court to clarify confusion here, even if we don’t have a perfect case because of the (arguably)  non-latent public code violation.   In the editor’s view, they should make clear that all commercial leasing parties can bargain to whatever balance they choose with regard to property condition, but the editor is comfortable with the notion that if the lease is silent, there’s an implied warranty against latent defects and a continuing landlord’s duty to maintain essential facilities.  The first is simply a restatement of the common law and the second is not a huge extension of responsibility - just a transfer of duty to commence negotiations on these points.  The parties generally negotiate on these points anyway.

Comment 4:  Note that another aspect of the warranty in Texas is the abolition of the independence of covenants doctrine.  Can this be waived separately?  The editor is aware of no authority.  Maybe the court ought to discuss this while it’s at it.

Comment 5: While we’re at it, maybe the court could clarify the impact of “as is” clauses on fraud.  In many cases, a buyer or lessee will be influenced by the seller’s or landlord’s fraud not to conduct certain inspections or to accept risks that otherwise they would not.  In the editor’s view, “as is” does not give fraud a free ride.  Where, however, there is evidence that the other side relied upon its own inspections, and not upon fraud, then arguably there is no reliance.

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