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If a Landlord Wants to be Absolved from Liability for its Leaky Roof, the Lease Must be Drafted to Clearly Exempt the Landlord from Such Liability

A landmark case is defined in Ballentine's Law Dictionary as “A reported case of great importance in establishing a legal proposition of law.” While the recent decision of the Supreme Court of Virginia in Landmark HHH, LLC v. Gi Hwa Park, 277 Va. 50 (Va. 2009), might be a landmark case in name only, it provides an excellent reminder to those who draft commercial leases that specificity is better than ambiguity in protecting the rights of the party that drafts the lease.
The tenant and the landlord executed a lease in 1998 for the tenant to operate a high-end imported men’s clothing store in a Fairfax County shopping center. From the opening of the store in 1998 through September, 2005, the roof regularly leaked, allowing water to enter the store. The tenant repeatedly reported the leaks and resulting damaged ceiling tiles, and the landlord made numerous attempts to repair the roof and fix the damage to the store interior. As a result of numerous complaints by the tenant and other businesses in the shopping center, the landlord had a new roof designed and installed between September, 2005 and February, 2006, but that failed to stop the leaks, and the landlord had further repairs made to a drain and to flashing on the new roof.
Unfortunately, there was a record rainfall the night of June 25, 2006, and the roof failed, flooding the tenant’s store and causing substantial damage to its inventory. Most of the inventory was not recoverable even after attempts were made to clean it. Ultimately the store was closed because the odor from the flooded interior could not be removed. The tenant filed an action in circuit court seeking damages for breach of the landlord’s lease obligation to provide a serviceable roof and quiet enjoyment of the leased premises. The tenant presented a commercial roof repair expert who testified that the new roof contained improper flashing and inadequate drainage. Although the landlord asserted that it was not liable under the lease, the tenant was awarded $ 282,618 for the two-thirds of the value of the lost inventory that was not covered by the tenant’s insurance.
The landlord had intended to protect itself from such liability with lease provisions that required the tenant to maintain insurance on its inventory and provided that the parties were released from liability or subrogation for any damages or claims that were covered perils under any insurance policies. Paragraph 16(b) of the lease stated that “Tenant, at its sole cost and expense, shall be responsible for providing a policy of fire and extended coverage insurance, insuring Tenant's inventory.” Paragraph 37(c) of the lease stated that “Landlord and Tenant hereby release the other from any and all liability or responsibility to the other or anyone claiming through or under them, by way of subrogation or otherwise, from any loss or damage to property caused by fire or any other perils insured under policies of insurance covering such property (but only to the extent of the insurance proceeds payable under such policies), even if such loss or damage is attributable to the fault or negligence of the other party, or anyone for whom such party may be responsible.”
The landlord argued that the intent of Paragraphs 16(b) and 37(c) was to place the entire risk of loss on the tenant and its insurer and to absolve the landlord from any damages that could have been, or were covered, by insurance. The Supreme Court of Virginia found that the landlord failed to expressly limit its liability, which it could have done. “We agree with the circuit court that had Landmark, as the drafter of the lease, desired to be exempt from all liability for losses sustained by Park as the result of the common hazards to which the property would be subject, it was required to express the exemption in the plain language of the lease….(recognizing the principle that a landlord has "the power of providing expressly in his favor" when drafting a lease)….Landmark is, in effect, asking the Court to find implicit in the lease a term that it could have expressly included, but failed to do so.”
The Supreme Court instead found that the tenant had procured the required insurance and that the lease only prohibited the tenant from receiving a double recovery from both its insurer and the landlord. “Section 16(b) of the lease required Park to maintain insurance on her inventory, which she did. The language of this section, however, does not limit either party's ability to bring suit against the other for violations of the lease. Similarly, section 37(c) required Park to absolve Landmark from any losses she sustained "to the extent of the insurance proceeds payable" on such losses. The plain language of this section only prohibits Park from obtaining a double recovery on a loss sustained and requires Park to release Landmark from any claim of subrogation by her insurer.”
The lesson for legal counsel for landlords that draft commercial leases is clear. If your client is to be protected from liability for claims by tenants arising from such perils as water or fire damage in the building, the lease must specifically exempt the landlord from such damages and clearly state that the tenants are solely responsible. The lease in Landmark v. Park could have required the tenant to carry insurance for full-replacement value of its inventory and stated that the landlord was not liable for any damages that should have been covered by the required insurance. Instead, the lease simply required the tenant to obtain a policy that insured its inventory and then provided that the landlord was not liable for damages that were payable under that insurance. In addition, the lease could have provided that the tenant had no right of recovery at all from the landlord for damages resulting from a defective roof or other infrastructure. The tenant might have refused to accept such a provision in the lease, but it would have been negotiable, and the landlord could have sought to negotiate a better result than it later received in court.