LEASES; SUITABILITY FOR INTENDED USE: Landlord liable for violation Texas’
unique implied warranty of commercial suitability where the intended use under a
commercial lease is prohibited by a deed restriction filed of record,
notwithstanding “as is” clause.
Lee v. Perez, 120 S.W.3d 463 (Tex. Ct. App. 2003).
Landlords leased two lots to Tenant, limiting the use to the sale, financing and
insurance of automobiles. Following receipt of a notice that this use violated a
deed restriction limiting the use of the property to residential use only, the
plaintiff ceased business operations on the leased premises. A Texas statute
permits municipal authorities in large cities (we mean Houston) to enforce
private covenants.
The plaintiff then sued the defendants for damages. The defendants argued that
they did not breach the lease, even though Texas law implies a warranty by the
landlord under a commercial lease that the lease is suitable for the intended
commercial purpose. In responding to the contentions of the defendant, the court
made two rather remarkable holdings.
First, Defendants that the implied warranty only applies as to latent defects,
and that the deed restriction was not latent, since it was discoverable in the
land records. The court, however, held that the real property records do not
constitute the same constructive notice to tenants as they do to buyers of real
property. In fact, the court concluded that constructive notice from the land
records is relevant only to buyers of real property.
“Appellants contend [Tenant] is charged with constructive notice because the
deed restrictions appear in the county real property records. Real property
records constitute constructive notice to buyers, but the courts have not
generally imposed on others a similar irrebuttable presumption of notice.
[citing Heci Exploration Co. v. Neel, 982 S.W. 2d 881 )Tex. 1999). Were we to do
so, every prospective tenant would have to obtain a title opinion. We decline
appellant's invitation to extend the doctrine of constructive notice that far.”
Defendants further contended that the tenant had accepted the property “as is.”
But the court stated that such provisions are related to the physical condition
of the property, not the status of the title thereto. Here is the complete
analysis the court made of this proposition:
[Tenants] point to a provision indicating the tenant accepted the property "as
is." [ Paragraph 8 states in full:
CONDITION OF PREMISES. Tenant has examined and accepts the leased premises in
its present as is condition as suitable for the purposes for which the same are
leased, and does hereby accept the leased premises regardless of reasonable
deterioration between the date of this lease and the date Tenant begins
occupying the leased premises unless Landlord and Tenant agree to repairs or
refurbishment as noted in Special Provisions Such provisions may indeed waive
express or implied warranties, but this one did not. The "as is" clause here
related to the physical condition of the property that a physical examination
would reveal. The deed restriction here was not a "condition" of the premises,
and would not be disclosed by an examination of the lots themselves.”
Comment 1: There are indeed a number of sweeping decisions made by the court in
this little case - most of them, in the opinion of the editor - dead wrong. The
most significant is the determination that tenants are not on constructive
notice of recorded restrictive covenants. Huh?
First, the sole authority the court cites for this point is, in fact, authority
for the opposite proposition. IN the Heci case, the court differentiated land
records, which it stated, for reasons of certainty of land title, were
constructive notice to subsequent parties, from oil and gas records of the Texas
Railroad Commissioner, as to which it concluded an oil and gas lessee should not
be viewed as on constructive notice.
Second, the court makes no effort to differentiate the constructive notice
function of record information in the context of recording acts as opposed to
contract interpretation.
Third, even if it did make that distinction, the court should have found,
(albeit with some research effort it obviously was not inclined to undertake),
that there are hundreds of cases concluding that tenants are viewed to be on
constructive notice of defects in title that are discoverable through land
records. Tenants sometimes don’t check land records, it’s true, but in general
the law regards them as taking that step at their peril.
Comment 2: The court then bumbles on to conclude that the “as is” clause did not
pertain to the land, but only to the buildings. And as to the buildings, it
pertained only to their physical condition, and not otherwise, although there is
nothing in the clause clearly making those distinctions.
There is many an “as is” clause case that would not be so restrictive in its
interpretation. The Tenant did not lease space in buildings - it leased two
improved lots. It is true that the bulk of the clause deals with physical
condition of the buildings - this is not surprising. But “inspection of the
leased premises” need not refer only to an analysis of the state of repair of
the buildings. It this is really Texas authority, then Texas lawyers are going
to have to add a page or two to every “as is” clause documenting exactly what
specific perils the tenant has agreed to accept.
Comment 3: As the covenant in this case could be enforced as, in effect, a
zoning restriction (this is Houston - remember - where real zoning is deemed
tantamount to Communism), it might be argued that the same rules the court uses
here might apply to real land use rules. Note that another Texas decision
reinterpreting the Davidow rule was not discussed by the court and perhaps not
cited, as it doesn’t come up in a West authorities search of Davidow. In Coleman
v. Rotana, Inc., , 778 S.W. 2d 867 (Twx. App. 1989), tenant signed a lease
requiring that it operat a “first class restaurant and bar” in a strip shopping
center in Dallas. Because the landlord has also leased property to other
restaurants, tenant complained that there was inadequate parking. In addition,
there was a legal problem, because the city issued a warning to tenant for
violating the parking code. When the restaurant closed and landlord sued for the
rent, tenant counterclaimed for breach of the Davidow implied warranty, and the
court rejected the claim, concluding that the Davidow warranty was limited to
latent physical or structural defects that the landlord had a duty to repair,
and in any event did not apply to common areas such as parking. The editor
criticized the case when it was decided, as the editor did not see the common
area limitation in the Davidow warranty, but the case provides the necessary
“split in the circuits” to get this issue before the Texas Supreme Court. It’s
probably already to late for the instant case, but undoubtedly there will be
more.
Comment 4: Davidow remains virtually unique to Texas. Only Utah has really come
close. In Richard Barton Enter., Inc. v. Tsern, 928 P.2d 368 (Utah 1996), there
was an express warranty that ultimately the court enforced, but prior to that
the court spent several pages discussing approvingly the notion of an implied
warranty in commercial leases. The court, in dicta, did seem to do away with the
“independence of covenants” concept in Utah, holding that a breach of a lease
covenant constituted a defense to rent obligations even without constructive
eviction.
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