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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