Commercial landlords and tenants could be materially impacted by a case recently decided by the Court of Appeal. In Frattelli v. 350 North Canon Drive, LP, the Tenant (Frattelli) brought numerous claims against the Landlord (350 North Canon Drive LP) based on Frattelli’s allegations that the Landlord’s shopping center renovations made it impossible for Frattelli to operate its business in the leased premises. The Court of Appeal found for the Landlord and upheld the lower court decision that an exculpatory clause in a commercial lease protected the Landlord from liability even if the Landlord acted negligently under the lease. (2011 WL 6358528).
Frattelli argued that Landlord failed to exercise reasonable care in remodeling the shopping center, which not only contravened the covenant of quiet enjoyment, but that such conduct was also grossly negligent and/or negligent. The lease at issue between Tenant and Landlord was a commercial “net” lease which had two clauses that the Court of Appeal rested its decision of finding for the Landlord in this case. One, and most importantly, an exculpatory provision providing that Landlord would not incur any liability due to a breach of lease or negligence (and Tenant’s sole remedy for any such damages was a claim through Tenant’s insurance), and two, a more specific provision which limited Landlord’s liability in the case of doing renovations at the building.
A commercial lease may limit the covenant of quiet enjoyment, whether express or implied. However, an exculpatory clause which purports to shield a landlord from liability for negligence must be strictly construed. The Court reasoned that the plain language of the lease provided that Landlord had no liability under any circumstances and the provision effectively protected Landlord from any liability due to negligence or breach of the lease. This was further bolstered by the specific provision limiting Landlord’s liability due to renovations.
Frattelli also alleged that the exculpatory clause was unenforceable because it was not sufficiently conspicuous within the lease as a whole, including the fact that it was printed in the same font size as the other provisions in the lease and not set off separately. Generally, when a party relies on an exculpatory clause which exempts itself from negligence, words clearly and explicitly expressing that intent of the parties are required. The Court held that there is a lower standard when finding a release valid in a commercial lease, especially a “net” lease which signals that it contains significant provisions regarding a tenant’s responsibilities. Therefore, in light of the lower standard, and since the exculpatory clause was not hidden or disguised, the release was enforceable against Tenant.
Finally, Frattelli maintained that even if the exculpatory clause protected Landlord’s negligence, Landlord’s actions were grossly negligent. A landlord cannot exempt itself from its own gross negligence in a lease provision. To constitute “gross negligence”, misconduct must either demonstrate a “want of scant care” or “an extreme departure from the ordinary standard of conduct”. Here, Landlord met with the tenants prior to the remodeling project, made attempts to address their concerns throughout the process and abated their rent. Although Landlord’s work ultimately took one year rather than six months, the Court of Appeal found that the foregoing mitigating measures meant that their conduct did not rise to the level of gross negligence.
The Frattelli decision is beneficial to commercial landlords as it shows that the courts will uphold provisions in commercial leases which limit landlord’s liability from negligence or breach of the lease, and covenants such as quiet enjoyment. This is especially true when the commercial lease is a “net” lease in which the Tenant takes on the major burdens of ownership of the property over the life of the lease. Finally, although an exculpatory provision would not absolve a Landlord for its gross negligence, this decision also highlights that if a landlord takes reasonable precautions, then gross negligence will be difficult to prove.
The issues discussed in this update are not intended to be legal advice and no attorney-client relationship is established with the recipient. Readers should consult with legal counsel before relying on any of the information contained herein. Reuben & Junius, LLP is a full service real estate law firm. We specialize in land use, development and entitlement law. We also provide a wide range of transactional services, including leasing, acquisitions and sales, formation of limited liability companies and other entities, lending/workout assistance, subdivision and condominium work.
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