Daily Development for Monday, November 8, 2004

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; LANDLORD'S LIABILITY FOR INJURY TO TENANT; WAIVER: California court analyzes enforceability of waivers of negligence in commercial lease.

Burnett v. Chimney Sweep, 2004 Westlaw 2445249 (Cal. App. 11/2/09)

The case involves an allegation of personal injury caused by mold in the walls of a small space in a hotel leased as a gift shop by the corporate landlord. The property was managed by a management company that was named as a codefendant. The plaintiffs contended that they repeatedly notified the respondents (presumably both the owner and the manager) of the condition and that they did nothing to remedy it, all to plaintiff's severe injury to both person and property (even emotional distress).

The trial court granted summary judgment to all defendants on the basis of a waiver of liability clause contained in the lease. As this clause is central to the discussion, we will set it forth here in full:

"In moving for judgment on the pleadings, respondents contended that paragraphs 8.4 and 8.8 of the lease shielded them from liability. Paragraph 8.4 required appellants to maintain "full replacement cost" insurance coverage on their personal property. Paragraph 8.8 was entitled "Exemption of Lessor from Liability." It provided:

"Lessor shall not be liable for injury or damage to the person or goods, wares, merchandise, or other property of Lessee, ... whether such damage or injury is caused by or results from fire, steam, electricity, gas, water or rain, or from the breakage, leakage, obstruction or other defects of pipes, fire sprinklers, wires, appliances, plumbing, air conditioning or lighting fixtures, or from any other cause, whether said injury or damage results from conditions arising upon the Premises or upon other portions of the Building of which the Premises are a part, from other sources or places, and regardless of whether the cause of such damage or injury or the means of repairing the same is accessible or not.... Notwithstanding Lessor's negligence or breach of this Lease, Lessor shall under no circumstances be liable for injury to Lessee's business or for any loss of income or profit therefrom."

To dispose of one intriguing issue first, the court held that the manager was neither a party to the lease nor a third party beneficiary, and hence could not rely on the waiver language at all.

Plaintiffs first alleged that the exculpatory clause was unenforceable to the extent that it absolved the landlord from liability for negligence, because such clauses violate public policy. Not in California, said the court. Public policy can be invoked to invalidate contracts only where the transaction exhibits some or all of six characteristics:

"[1] It concerns a business of a type generally thought suitable for public regulation; [2] the party seeking exculpation is engaged in performing a service of great importance to the public, which is often a matter of practical necessity for some members of the public. [3] The party holds himself out as willing to perform this service for any member of the public who seeks it, or at least for any member coming within certain established standards. [4] As a result of the essential nature of the service, in the economic setting of the transaction, the party invoking exculpation possesses a decisive advantage of bargaining strength against any member of the public who seeks his services. [5] In exercising a superior bargaining power the party confronts the public with a standardized adhesion contract of exculpation, and makes no provision whereby a purchaser may pay additional reasonable fees and obtain protection against negligence. [6] Finally, as a result of the transaction, the person or property of the purchaser is placed under the control of the seller, subject to the risk of carelessness by the seller or his agents."

It is significant that the court found that none of these factors were present here, even though clearly the gift shop was a tiny operation and arguably lacked significant bargaining power. The court commented that "a commercial lease is a matter of private contract between the lessor and lessee with which the general public is not concerned."

Although the court reached the conclusion that parties could agree to exculpate a landlord from its own negligence (or that of its agent), the question still arises whether the parties in fact did so, and therein lay the rub for the landlord here.

The court noted that California law makes clear that such exculpation clauses must be read very narrowly, and that provisions that generally waive liability for damages to persons or property for a variety of named causes, but do not mention negligence, will serve to protect the party in question from liability from "passive" negligence, but not from "active" negligence. The same is true of clauses, such as Section 8.4, discussed above, that purport to limit claims only to the amount of insurance. Again, if negligence is not specifically mentioned, the court will assume only claims based on passive negligence are covered, and not those based upon active negligence.

Which negligence is which? The court said that this is not so clear as might first appear, and normally is a question of fact case by case. In a prior case, the knowing maintenance of leaking sewers and the failure to take adequate actions to repair them constituted active negligence, even though there was no allegation that the landlord had been negligent in carrying out the repairs it did.

The court concluded that the landlord here that the landlord would be viewed as guilty of "active negligence" if it had a duty to repair or remediate the leaking conditions that led to the mold in tenant's premises and failed to do so. It could not determine without a trial of the facts whether the landlord had such a duty. The lease allocated to the tenant the duty to care for the premises, and to the landlord the duty to maintain the surrounding building. As the complaint did not make clear where the source of the moisture lay, it was impossible to determine as a matter of law that the landlord had no remediation responsibility.

Once this bridge was crossed, the court also reversed the denial of summary judgment as to the emotional distress counts. Although "extreme and outrageous" conduct by a defendant is required to support such a claim, a prior California decision had already concluded that a court could so characterize a landlord's "knowing, intentional and wilful" failure to perform its contract maintenance responsibilities.

Note that the clause in question does specifically mention absolving landlord from its own negligence, which conceivably would make the discussing of active vs. passive negligence moot, but the specific negligence waive appeared only in the last sentence, where the tenant absolved the landlord from liability for lost profits or other injury to the business." This was not enough to help the landlord with all the other claimed damages, although, at least inferentially, the court appears to have held that it was valid as to any claimed business losses.

Comment 1: The landlord deserved to lose here because it failed to secure a contractual waiver that clearly absolved it from negligence. The editor agrees that a waiver of a parties negligent conduct is significant, and ought to be done expressly. That didn't happen here.

Comment 2: The really big news in the case is that landlords with good lawyers normally will not have to lose in the future, since the court expressly approves "waiver of negligence" clauses as binding on the parties in a commercial lease if properly drafted.

Comment 3: What is the reach of this case to standard "waiver of subrogation" clauses - in which a party waives for its insurer any claim against the other party where the damage is covered by insurance? Well drafted leases often include mutual reciprocal waivers of subrogation, although sometimes an unscrupulous "power party" will benefit only itself. Is subrogation waived as to negligence where the waiver of subrogation fails to mention negligence? The point normally would be moot if there is a clear and enforceable waiver of claims for negligently caused damages generally. But, failing that, does a California waiver of subrogation clause have to specifically mention negligently caused injury? Hmmmm.

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