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Real Estate Law

10/14/2009 1:24:11 PM EST

Properly Drafted Exculpatory Clauses in Favor of Commercial Landlords Are Enforceable

By Ted Zwayer

Posted by Ted Zwayer

Recently I discussed a court ruling that was a reminder to legal counsel for commercial landlords to carefully draft leases. In Landmark HHH, LLC v. Gi Hwa Park, 277 Va. 50 (Va. 2009), the Supreme Court of Virginia held that an exculpatory clause that the landlord apparently intended to protect it from liability for damages from a leaky roof allowed the tenant to recover from the landlord the tenant’s losses that were not covered by the tenant’s insurance. The Virginia Supreme Court found that rather than eliminating the liability of the landlord, the supposed exculpatory clause only prevented the tenant from recovering double damages from his insurer and the landlord.

A decision from the Court of Appeals of Minnesota last month reveals how an exculpatory lease clause should be drafted and will bring joy to legal counsel for landlords. In Scoreboard Sportswear, Inc. v. WelshCo, LLC, 2009 Minn. App. Unpub. LEXIS 1017 (Minn. Ct. App. Sept. 8, 2009), the court upheld an exculpatory clause that protected a landlord from liability when the landlord’s fire-suppression system failed to operate properly and caused significant damage to a tenant’s business.

Scoreboard was a wholesaler of sports memorabilia and was located in an office building/warehouse owned by WelshCo. The building’s fire-suppression system contained a water-flow switch that was supposed to send a signal to a phone dialer, which automatically phoned the fire-monitoring company when water flowed through the pipes to the fire sprinklers in the building. WelshCo hired Viking Automatic Sprinkler to inspect and maintain the sprinkler system and Checkpoint Security Systems Group to inspect and maintain the fire-alarm system. In 2005 and 2006, both Checkpoint and Viking inspected the sprinkler and fire-alarm system and notified WelshCo that the water-flow switch was not working properly and needed to be replaced.

On or about July 10, 2006, a sprinkler-head malfunctioned and water flooded Scoreboard’s business because the water-flow switch did not work and thus no one was notified that the sprinkler-head was operating. Scoreboard sued WelshCo, Viking, and Checkpoint for damages. WelshCo claimed that it was not liable because of two exculpatory clauses in the lease, and Viking and Checkpoint defended on the basis that they owed no duty to Scoreboard because there was no privity of contract or special relationship with Scoreboard. The trial court agreed with the defendants and granted summary judgment to them.

The lease between Scoreboard and WelshCo contained these two provisions:

CASUALTY INSURANCE:

[15]c. . . . Tenant hereby waives and releases all claims, liabilities and causes of action against Landlord and its agents, servants and employees for loss or damage to, or destruction of, any of the improvements, fixtures, equipment, supplies, merchandise and other property, whether that of Tenant or of others in, upon or about the Premises resulting from fire, explosion or the other perils included in standard extended coverage insurance, whether caused by the negligence of any of said persons or otherwise. The waiver shall remain in force whether or not the Tenant's insurer shall consent hereto.

NON-LIABILITY:

19. . . . Landlord shall not be liable for damage to any property of Tenant or of others located on the Premises, nor for the loss of or damage to any property of Tenant or of others by theft or otherwise. Landlord shall not be liable for any injury or damage to persons or property resulting from fire, explosion, falling plaster, steam, gas, electricity, water, rain or snow, or leaks from any part of the Premises or from the pipes, appliances, [*6] or plumbing works, or from the roof, . . . . Landlord shall not be liable for any latent defect in the Demised Premises. All property of Tenant kept or stored on the Demised Premises shall be so kept or stored at the risk of Tenant only and Tenant shall hold Landlord harmless from any claims arising out of damage to the same, including subrogation claims by Tenant's insurance carrier. (Emphasis added)

Scoreboard argued that exculpatory clauses in general were disfavored and to be construed against the drafter, that the clauses in question were ambiguous and thus unenforceable, and that the clauses were against public policy because of the disparity of bargaining power between the landlord and the tenant.

Scoreboard argued that the term "or otherwise" found in the exculpatory clauses, which I have highlighted above, created an ambiguity because it was overbroad and purported to release WelshCo from liability for intentional, willful, or wanton acts. The court of appeals rejected that argument, finding that similar language had been upheld by courts in previous decisions and that “the lease considered as a whole evinces an unvarying intent to release WelshCo from claims arising in negligence and does not create ambiguity as to whether WelshCo would be released for intentional acts. As a matter of law, the exculpatory provisions, standing alone, are not ambiguous.”

The court of appeals rejected the disparity of bargaining power argument, finding that this was not an adhesion contract. Scoreboard asserted that there was huge disparity in the relative bargaining position because WelshCo was very large and controlled vast amounts of leased property, there were few other real estate options available to Scoreboard, and Scoreboard had no opportunity to negotiate any changes in the lease. “But the record is completely devoid of facts regarding the parties' relative bargaining power, real-estate options available to appellant, or the nature and extent of the parties' negotiation efforts. Thus, appellants' claim that the lease constituted an adhesion contract fails, and the exculpatory provisions do not contravene public policy…. The supreme court has held that parties to a commercial lease may, without violation of public policy, protect themselves against liability resulting from their own negligence."

Clearly, the exculpatory clauses in the Scoreboard/WelshCo lease were far superior to the similar provisions in Landmark HHH, LLC, at least from the landlord’s point of view. Concise and precise drafting of lease provisions will always trump sloppy drafting and the use of forms