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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