§ 10.01 Obligations of the Parties

• Jurisdiction: United States
• Publication year: 2022

§ 10.01 Obligations of the Parties

Determining who will be responsible for repairs and maintenance can be complicated. A number of factors go into deciding who will have that responsibility. While usually responsibility will turn on whether the repair in question is structural or nonstructural, it is important to delineate clearly who will be responsible for what and the extent of that duty. In New York, typically, landlords are responsible for structural repairs while tenants are responsible for nonstructural repairs.² However, in a net-lease situation, the tenant is generally responsible for both types of repairs.³ Ideally, the lease will set forth what repairs are considered structural.

In most instances, either or both the landlord and tenant have insurable interests. Who can get the insurance and at what cost should certainly factor into deciding who should bear responsibility. The party with control of, access to, and use of the property usually is the one who should have responsibility to maintain and repair it.

Both landlords and tenants have insurable interests in leasehold improvements.⁴ Such improvements may be covered under separate fire insurance policies and be the subject of insurance claims. Although each party may be covered for some loss, one or both parties may have an interest in shifting the final economic obligation for repair and restoration to the other and its carrier. It is necessary that the parties work to clarify responsibilities and resolve these issues. The parties should at least consider the following:

(1) The cost of restoring leasehold improvements may be greater than the landlord's initial economic contribution undertaken at the lease commencement. The tenant may have made further alterations, which result in higher premiums. For example, the tenant may have installed a high tech kitchen, executives' bathroom, vaults, libraries, internal stairways, or paneling. The cost of restoring such improvements can be substantial.⁵

(2) If some of the tenant's improvements must be specially manufactured or installed, the landlord's completion of restoration may be delayed. Under these circumstances, the landlord may require that rent abatement be correspondingly shortened.⁶

(3) Leases requiring a landlord to restore damaged leasehold improvements may be of little value to a tenant whose installation becomes outdated or no longer suitable to its business operation. As such a tenant would design a new installation rather than merely replace the old one. Under these circumstances, landlords should be certain that replacement cost insurance would cover the redesign cost. Any extra costs should be covered by the tenant. The tenant should also make certain that it can get the allowance to apply to redesigning the premises.

In terms of any defaults, often statutes and the leases themselves will afford the parties a cure period. The time to consider what is reasonable, which defaults can be cured or not and which defaults should be given a cure period is when the lease is negotiated. Liquidated damages provisions are often set forth in leases. The purpose of such provisions is to arrive at an approximate estimate of damages in the case of a breach. However, if the amount is excessive, the court may set it aside as a penalty.⁷ On the upside, if the amount is a reasonable estimate, the parties will have an agreed upon amount for the payment in the case of a breach and thus be able to avoid the need to litigate the issue of damages.⁸

The following is a basic, bare bones provision calling for landlord to maintain and repair the property in a "first-class" manner. The tenant is also required to make repairs necessitated by its misuse of the premises.

Repairs

(a) Landlord shall maintain and repair, in a first-class manner, (i) the walls, foundation, structural support columns running through the Premises, if any; (ii) the roof of the Building; (iii) the plumbing, heating, ventilation, air conditioning, electrical, sprinkler, telecommunications risers, equipment, panels and cabling from the minimum point of entry into the Building up to the Premises, and other systems and installations serving the Premises and the common areas of the Building and land; and (iv) its parking facilities and the exterior of the Building. Landlord shall make any and all other repairs except those specifically required to be made by Tenant.

(b) Tenant shall take good care of the Premises and shall make all repairs necessitated by its misuse of the same.

(c) In the event that Landlord fails to make or diligently complete any repairs for which it is responsible, Tenant may, upon Ten (10) days prior written notice (except in the case of an emergency when no notice shall be necessary), cause such work to be completed on behalf of Landlord and at Landlord's sole cost and expense. Tenant shall have the right to offset any amounts it has spent under this subsection against any Rental next due and owing after such expenses have been incurred.

As noted above, many factors influence the decision of who should be responsible for what. The repairs provision should be tailored to the needs of the specific parties, availability of insurance and the costs involved.⁹

[1]—Landlord Obligations

"For decades, the doctrine of caveat emptor provided the basis for the common law rule that a landlord has no obligation to make repairs (based upon the reasoning that the tenant leased the premises on an 'as-is' basis and assumed all of the risks associated with that 'as-is' condition)."¹⁰ Over time, however, some jurisdictions modified this approach, mostly in the residential leasing context, "affording greater protection for residential tenants by imposing an implied warranty of habitability in such leases."¹¹ In the commercial leasing context, many jurisdictions remained reluctant about modifying the common law rule. In the absence of a ruling to the contrary, practitioners believed that the common law rule still applied to commercial leases.

[a]—The Majority Rule

In an overwhelming majority of other jurisdictions, including New York, there is no implied obligation of habitability on the part of the landlord. Quite to the contrary. These jurisdictions follow a caveat emptor relationship. If a tenant expects a landlord to maintain, repair or replace components of a building outside of the demised premises, the landlord must covenant to do so in the lease.¹² If the landlord does not covenant, but merely states that it shall, in some jurisdictions, the breach of that obligation is not considered of a magnitude to allow the tenant to withhold rent. The tenant should try to get the landlord to be responsible for all structural repairs to the premises and to the building as well as any nonstructural repairs made necessary by the landlord's negligence.

[b]—The Minority Rule

In several jurisdictions, the common law has been eroding.¹³ Courts are deviating from the common law rule in commercial leases, moving toward imposing an affirmative duty on commercial landlords to undertake repairs to leased premises.¹⁴ For example, in New Mexico "the courts have rejected the common law rule outright and have imposed a duty on commercial landlords to remedy defects that a reasonable inspection would reveal prior to letting the premises."¹⁵

Although other jurisdictions generally continue to recognize the common law rule that commercial landlords do not have a duty to tenants or their invitees for unsafe conditions on the leased premises, some exceptions have been carved out by case law, including decisions "imposing liability where the landlord conceals a defect or reserves the right in the lease to enter the leased premises to make repairs and receives notice of an unsafe condition."¹⁶ Some have even imposed an implied warranty of habitability to commercial as well as residential leases.¹⁷

This obligation requires the landlord to make sure that the premises are habitable and safe for the tenant's utilization for its operations. In these jurisdictions, the landlord's right to receive rent is conditioned upon its performance of its obligations.

In a case of first impression in the Commonwealth of Massachusetts, the Supreme Judicial Court made Massachusetts the latest jurisdiction to join this trend, holding that Massachusetts General Laws, Chapter 186, § 19 applies to commercial landlords.¹⁸ That law concerns a landlord's duty to make repairs when notified of an unsafe condition. This decision "alters the long-standing common law rule that Massachusetts commercial landlords are only obligated to make repairs to common areas or when they specifically contract to make repairs."¹⁹ As a result of the decision, "Massachusetts commercial landlords are now required to remedy unsafe conditions that exist anywhere on a leased premises once they are given proper notice."²⁰

According to Section 19, "a landlord who receives notice via registered or certified mail from a tenant of 'an unsafe condition not caused by the tenant, his invitee, or any one occupying through or under the tenant' is obligated to 'exercise reasonable care to correct the unsafe condition' within a reasonable time following receipt of the notice."²¹ The statute further provides that when a third party rightfully on the leased premises "suffers an injury 'as a result of the failure [of the landlord] to correct said unsafe condition within a reasonable time,' such injured third party shall also have a right of action sounding in tort against the landlord."²²

According to the Massachusetts court, any lease provision that attempts to waive a commercial landlord's obligations under Section 19 is "void and unenforceable."²³

It...