Daily Development for Wednesday, November 1, 2006
by: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri

LANDLORD/TENANT; TENANT’S LIABILITY TO THIRD PARTIES; FIXTURES: Tenant that leaves trade fixtures on premises to be used by employees of successor landlord may be liable to plaintiff injured due to defects in the fixtures even if the current tenant has agreed with the landlord that the fixtures are taken “as is.”

Dutchmen Manufacturing, Inc. v. Reynolds, 849 N.E. 2d 516 (Ind. App. 2006)

Dutchmen leased property from Chapman and operated a manufacturing facility there.  As part of this operation, Dutchmen, without Chapman’s knowledge or consent,  installed scaffolding near the ceiling of the building.   The lease provided that any trade fixtures left on the premises after the lease ended became the property at landlord at landlord’s option.  The landlord also could require the tenant to remove the fixtures.  The scaffolding in question was conceded by all parties to constitute a trade fixture.

When the lease ended, Chapman first demanded that Dutchmen remove the scaffolding.  Before this occurred, however, it developed that the incoming tenant desired that the scaffolding be left in place.  As it would have been expensive for Dutchmen to remove the scaffolding, it eventually reached an agreement that it would simply leave the scaffolding in place for no compensation.  The new lease provided that tenant accepted the premises “AS IS” and, further, the president of the new tenant delivered an affidavit to Chapman that his company “acepted and took possession of the scaffolding . . . at its own risk, regardless of whether the scaffolding contained defects or deficiencies.”

Good call - landlord!!  A short time later, a portion of the scaffolding fell from the ceiling and struck an employee of the new tenant, rendering the employee quadriplegic.  The employee sued Dutchmen, alleging that its experts had ascertained that the scaffolding contained negligent welding and lubrication, and that the defect was contained inside a pipe constituting an “outer sleeve” which was capped, and thus effectively invisible to anyone inspecting the scaffolding.  The scaffolding had been constructed by Dutchmen employees.

The injured employee sued Dutchmen under Restatement of Torts Section 388, which states that “one who supplies directly of indirectly through a third person a chattel for another to use is subject to liability to [expected users or others injured by expected usage] for physical harm caused by the use of the chattel . . . if the supplier knows or has reason to know that the chattel is or is likely to be dangerous for the use for which it is supplied [and the problem is unlikely to be discovered and know warning is given.]”

Dutchmen argued that it hadn’t “supplied” a chattel because the scaffolding “merged” into the real estate when it was left on the premises following the expiration of the lease, and became the property of the landlord.  The court held that the fact that the landlord had in fact originally demanded that the tenant remove the scaffolding indicated that no merger had in fact occurred, and that the scaffolding, which, as a trade fixture, was a “chattel,” passed directly from Dutchmen to the new tenant.

But the court went on to say that the question of whether the landlord was an intermediate owner of the scaffolding was irrelevant to its conclusion of Dutchmen’s liability here.  Once the item is “supplied,” then potential liability exists.  The court analogized to a contractor supplying faulty wiring that is installed into a building, thus become part of the “real estate.”  The supplier would still be liable under Restatement 388 if the defect in the wiring led to a foreseeable injury.

Dutchmen then argued that the new tenant contractually assumed the risk of defects in the scaffolding when it accepted the scaffolding “as is.”  The court first noted that the “as is” agreement was with the landlord, not with Dutchmen, and simply was a waiver of claims, if any, against landlord Chapman.  In fact, the language in the lease itself likely didn’t apply to the scaffolding at all, since the scaffolding was not part of the leased premises, as ownership of it passed directly from Dutchmen to the new tenant.

In any event, the court held, parties cannot, through an “as is” agreement, transfer risk from themselves to non-parties.  Any allocation of responsibility to the new tenant did not absolve Dutchmen of liability for its negligence insofar as  plaintiff was concerned.   The court cited cases for the proposition that an employer’s indemnification of a third party does not limit an employee’s claims against that third party.   (The court did not decide that the “as is” affidavit constituted such an indemnification, but concluded that it wouldn’t have mattered if it did.)

Comment 1: The case is correct, and largely based upon tort principles, rather than upon property concepts.   The issue of tenant’s duty to remove fixtures is remarkably unresolved.  Compare U.P.C., Inc. v. R.O.A. General, Inc., 990 P.2d 945 (Utah App. 1999) (the DIRT DD for 12/7/99) (tenant that installs fixtures or improvements with landlord’s knowledge and consent has no duty to remove them at lease end) with  S.S. Air v. City of Vidalia, 2006 Westlaw 399749 (Ga. App. 2006) (contra). 

Comment 2: Of course, the practice lesson for the landlord is a good one.  Murphy’s law insures that if that scaffolding might be dangerous, it will be dangerous, and therefore if it stays, the landlord wants complete protection.  It got it here.   

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