Daily Development for Tuesday, March 30, 1999

by: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri
randolphp@umkc.edu

Note that there are two items here dealing with the same case:

LANDLORD/TENANT; RENT; ABATEMENT: Where the lease provides for abatement of rent while the premises are being rebuilt after their destruction by fire, without reference to the cause of such fire, the landlord is not entitled to collect damages for loss of rental income during that time even when damage is caused by tenant's negligence.

Five U's, Incorporated v. Burger King Corporation, 962 P.2d 1218 (Mont. 1998). This case also is discussed under the heading: "Landlord/tenant; Insurance; Injury Caused by Tenant."

Tenant's employee's negligence caused a grease fire that destroyed the premises. The lease provided that rent would abate during any period of time that the premises could not be used due to fire damage, and did not contain an exception for tenant's negligence. Landlord nevertheless sued the tenant in tort for loss of the rental income from the property during the period of rebuilding.

Landlord argued that for the court not to "read in" an exception for tenant's negligence was to give effect to a "waiver of negligence" clause, which authority in this state and others have found to be invalid unless very rigorous drafting standards are satisfied.

The court disagreed with the landlord. The court saw the rent abatement clause as a separate contractual undertaking and not an effective waiver of claims against tenant for negligence. Therefore, the contract clause was enforceable, and the consequence of finding it enforceable was to bar the landlord from circumventing the clause by suing the tenant in tort.

A dissent argued that the abatement of rent clause said nothing about tort actions, but simply prohibited the landlord from recovery in contract. Tort claims, and for that matter, tort damages, are quite distinct actions, and need not be governed by a broadly worded allocation of the direct liability for rent. The dissent would have permitted the landlord to sue in tort.

Comment: The editor tends to side with the dissent here. There are many tort concepts that govern a tort claim that are quite different from a contract claim. The fact that a party may not be able to collect contract damages ought not to preclude it from proving its claim in tort. The contract clause in question here does not appear to have been a waiver of claims based upon negligence nor an allocation of risk of loss due to negligence. It was a broadly worded clause that did not address negligence at all. Although the editor has no quarrel with the notion that the clause nevertheless did bar any contract claim for rent notwithstanding tenant's negligence, if the tenant's negligence also sounded in tort, the landlord ought to be able to recover damages.

LANDLORD/TENANT; INSURANCE; INJURY CAUSED BY TENANT: When a landlord receives insurance proceeds from fire insurance purchased by tenant pursuant to the lease, the proceeds are not from a "collateral source" and must be applied against tenant's tort liability for the fire.

Five U's, Incorporated v. Burger King Corporation, 962 P.2d 1218 (Mont. 1998). This case is discussed further under the heading: "Landlord/tenant; Rent; Abatement."

A grease fire in a Burger King restaurant destroyed the restaurant, which was being subleased pursuant to a lease and sublease that required the tenant to maintain fire and casualty insurance on the property. The insurance proceeds were paid to the landlord to allow it to rebuild the premises. Although the insurance proceeds covered the cost of rebuilding, the landlord filed a tort action to recover the cost of rebuilding and the rental income lost during the time it took to rebuild the premises.

The landlord claimed the trial court erred in holding that the insurance proceeds constituted a payment made "by or for a defendant" which should be applied against the liability of the tortfeasor. The landlord argued that the insurance proceeds came from a collateral source, which would not reduce the recovery against the negligent tenant. The appellate court concluded that the insurance proceeds were not wholly independent of and collateral to the wrongdoer, as required by the collateral source rule, since the fire insurance was purchased in compliance with the tenant's obligations under the lease and sublease, and therefore the insurance proceeds were to be applied against the tenant's liability for negligence. The landlord also sought damages for loss of rent during the rebuilding process. The court denied this claim since the lease provided that the rent would abate during the rebuilding of the premises after their destruction by fire, and did not make any distinction as to whether such fire was caused by the tenant's negligence or otherwise.

Comment: This appears to be a "no brainer." Note that in a recent case, reported as the DD for March 6, 1999, a court held that even where the landlord itself acquired insurance against property damage, the insurance was obtained for the benefit of the tenant as well, since it is assumed that the landlord is using rent money to obtain the insurance. Lexington Ins. Co. v. Raboin, 712 A.2d 1011 (Del. Super. 1998).

Parties who recognize this reality ought to take care not to "double insure" by requiring the tenant to acquire insurance of a risk that the landlord is paying anyway, or visaversa. Usually the insurers will have clauses in their policies that will protect them against double payment for the same loss, even though they are both receiving premiums protecting against the same risk.

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