STRATEGIES TO LIMIT LIABILITY
This LARG looks at devices which limit the landlord's liability under the lease. The first section surveys some of the most common pro-landlord limitations with sample clauses and comment. The second section briefly looks at potential problems with the landlord's default clause from the tenant's perspective. Next is a pro-tenant check list concerning pro-landlord limitations of liability. Finally, the Lease Clause Critique analyzes several clauses which release the landlord from liability after a sale of the property.
Lease Clause Critique: A Sampler of Pro-Landlord Liability Limitations
Landlords have traditionally tried to limit their exposure to lawsuits and damages by including limitation of liability provisions in their commercial leases. The clauses contained in this article are representative of such provisions, which pertain generally to liability arising while the landlord still owns or holds title to the leased real estate. Although the landlord's objective is similar, the clauses which follow differ from limitations of liability or releases of liability for events occurring after the sale of the real estate by the landlord (see the Lease Clause Critique for examples of such clauses).
Clauses limiting the landlord's liability can be used in the lease documentation for virtually any type of property: office, retail or industrial. Like most matters, though, precisely how much exculpatory language the landlord can include in the lease is a function of the relative leverage of the parties. Of course, the current high vacancy rates in many markets drastically reduce the probability that the tenant will ultimately have to swallow such pro-landlord devices, at least in unmodified form.
Examples of four types of such clauses follow. They include:
- Project Equity Limitations. A project equity limitation confines the landlord's liability for damages arising from any particular lease or event to the extent of the landlord's equity in that particular project. In the landlord's view, they are analogous to non-recourse financing, since they limit the landlord's exposure for liability to its equity in the project. Of course, if the project is highly leveraged, a tenant with a large judgment will have to satisfy it from a small pie. And in the era of RTC auctions and plunging real estate values, landlords with generous equity positions are on the endangered species list.
- Agency and Trust Liability Limitations. Agency and trust liability limitations restrict the exposure of an agent or trustee to damage actions arising from its being in title or from its management of the real property subject to the lease.
- Limitations on Damages for Specific Acts. Clauses imposing limitations on damages for specific landlord actions were developed by landlords in response to successful damage actions by tenants based upon arbitrary acts or lack of "good faith and fair dealing" by landlords. Such cases often involve the landlord's withholding its consent which is required by the lease for a particular act (e.g., assignment or subletting of the premises). Such limitations seek to protect the landlord from suits for damages brought by tenants claiming the landlord's action were unreasonable, or outside the ambit of good faith and fair dealing between the parties.
- Liability Limitations for Landlord's Partners. The release of liability for partners who withdraw from the partnership constituting the landlord (or who retire or die) is the subject matter of the final category of liability limitation devices covered here. Such provisions are designed to cut off liability for partners who withdraw from the partnership owning the property, if the liability relates to events occurring after such withdrawal. Frequently, such provisions also release the entire landlord partnership if a successor partnership comes into title for the property.
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