Daily Development for Thursday, September 20, 2007
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; COMMERCIAL; IMPLIED WARRANTY OF FITNESS; WAIVER: Texas continues the dismantling of Davidow - court will enforce waivers of implied warranty of fitness in commercial leases and as is clause precludes a causation argument as to other claims based upon defective premises.

Gym-N-I Playgrounds, Inc. v. Snider, 220 S.W. 2d 905 (Tex 2007)

This important case affirms the lower court decision reported as the DIRT DD for 2/1/05.  It resolves a dramatic split in the lower appeals courts as to the meaning of Davidow and as to the application of the Prudential doctrine on as is clauses. [Prudential Ins. Co. .of Am. v. Jefferson Assocs., Ltd., 896 S.W. 2d 156 (Tex 1995) had upheld the application of an as is clause in a sale agreement of commercial property - holding that it demonstrated that the cause of any injury to the buyer as a consequence of defects in the premises arose due to the buyers failure to identify the problems, rather than the sellers failure to disclose or remedy them.]

The case construes the well known, but not particularly influential, holding in Davidow v. Inwood North Professional Group-Phase I, 747 S.W. 2d 373 (Tex. 1988).  This case, based upon some particularly good plaintiffs facts, concluded that commercial landlords in Texas implicitly warrant the suitability of their premises for a tenants commercial purposes.  The case involved a multi-tenant office building and a claim by a doctor occupying a relatively small portion of the building who suffered from significant structural and systems problems originating inside and outside of his leased area.  The case contained ringing language about the superior ability of a landlord to identify and remedy building problems and has been the darling of the law reviews.  But no court really has followed Davidow, and, as the court notes here, at least four jurisdictions have rejected it expressly.  (Kansas, Nebraska, New Hampshire, and North Dakota. [The editor believes that there may also be a Uta
h case rejecting the doctrine, following a case in that state that approved elements of it.].  The Texas court, and same commentators, claim that the sixties case of Reste Realty v. Cooper, 251 A. 2d 268 (N.J. 1969) adopted the concept, but the editor has always believed Reste to be a nuisance case involving flooding based upon the common area, despite its broader language suggesting an implied warranty ought to exist.]

The Davidow warranty was never as broad as the grandest of the implied warranties of habitability recognized almost universally in residential leases.  The court indicated that in determining whether there was a breach of the warranty, a court needed to consider:the nature of the defect; its effect on tenants 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.   Many of these factors would not be relevant to cases evaluating residential warranties.  Further, again almost universally, the residential  implied warranty of habitability cannot be waived.  

At another point in the opinion, the court indicated that the commercial warrant of suitability it was imposing on commercial landlords might be waived by a provision transferring express repair duties to the tenant.  This is consistent with statutory residential implied warranty provisions in many states, following the Uniform Residential Landlord Tenant Act.  But the Act carefully narrows those circumstances in which such waiver can occur.

Perhaps because of the broad expanse of the parallel implied warranty in residential cases, Texas courts following Davidow have been quite confused about how its recognition of the possibility of contractual warranty ought to be construed.  Some courts held that a broad contractual waiver ought to be upheld, while others confined the waiver to the narrow circumstance of a delegation to the tenant of specified repair duties.  When the Texas Supreme Court, however, decided in Prudential that broad as is clauses would be recognized on freedom of contract grounds in commercial real estate sales, the stage was set for a broader reading of the lease waiver language as well, and now we have it.

Unlike in Davidow, the facts of the instant case were tailor made for a decision upholding the validity of an express waiver.  Some years before, the tenants had purchased from the landlord the business they were operating in the leased premises, and in connection with that purchase leased the building.  The tenants were long time employees of the buildings and, in the words of the landlord, themselves knew more about the building than anyone else.  The City Code required that buildings containing combustible materials of certain kinds contain sprinkler systems, but the city inspector had not required sprinklers here, though he recommended them.  Tenants were fully aware of this.

The tenants, leasing under a hold over clause following the end of an initial five year term, suffered a fire that destroyed the premises.  The insurer paid them for their business losses and then brought a subrogation claim against the landlord based upon various grounds, including implied warranty, and all predicated on the absence of a sprinkler system and claimed defective wiring.

But the insurers ran head on into the language of the lease dealing with waivers of warranties:

Tenant accepts the Premises as is.  Landlord has not made and does not make any representations as to the commercial suitability, physical condition, layout, footage, expenses, operation or any other matter affecting or relating to the premises and this agreement, except as herein specifically set forth or referred to and tenantt hereby expressly acknowledges that no such representations have been made.  Landlord makes no other warranties, express of implied, of merchantability, marketability, fitness or suitability for a particular purposes or otherwise, except as set forth herein, and implied warranties are expressly disclaimed and excluded.

Although no masterpiece of English grammar, the clause undoubtedly expresses the meaning that there is no implied warranty given under the lease, and does not do so in the context of transferring any repair responsibilities to the tenant.  The court found the waiver enforceable, and found no implied warranty in the lease, thus resolving once and for all the enforceability of such waivers in Texas.  It makes virtually nothing of the various factors (listed above)  suggested by the Davidow court in determining whether a warranty breach as arisen, and does not make the validity of the waiver expressly dependent upon the special facts of the case (single use building leases to former key employees in connection with a sale of the business.)  Instead, the court relies upon reasoning in Prudential and other cases emphasizing the need for business to exist in an environment that upholds, to the greatest extent reasonable, the concept of freedom of contract. 

Predictably, after Prudential the court goes on to use the as is language in the waiver above to conclude that the insurers other claims against the landlord for negligence per se, gross negligence, violations of the Texas Deceptive Trade Practices-Consumer Protection Act, and fraud.  Any violations on these counts were not the cause of the tenants injury.

Because the tenant had no right to recover, the subrogated insurer was barred as well. 

Comment 1:   In case the reader wonders, there was a waiver of subrogation clause in the lease as well.  The court really wanted to chew on the waiver issue, and thus elected not to decide the case based upon waiver of subrogation.

Comment 2: Clearly the as is language and the waiver of implied warranties language are both going to be critically important to Texas landlords going forward.  Dont bargain for one without the other.

Comment 3: Is anything left of the Davidow language suggesting that courts ought to apply waivers only in narrow circumstances?  Certainly not while the current Texas Supreme Court membership is running the show.  And in light of the dismal history of Davidow in other courts, the editor suspects we wont see much of it anywhere else either. 

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