§ 25.02 Modern Liability

• Jurisdiction: United States
• Publication year: 2022

§ 25.02 Modern Liability

[1]—In General

Tenants usually assume considerable casualty and liability risk when entering into a commercial lease. Both the common law and more modern theories impart a large amount of risk for casualties upon a tenant that typically is not fully realized until a disaster occurs. States differ greatly from one another in apportioning responsibility to the landlord or tenant for a casualty loss.

By way of illustration of these risks, case law has not done much to clarify the liability of each party in a fire damage claim.¹ The holdings even vary with respect to the theories of liability that should be applied. The practitioner should be familiar with the current law in each state where his or her client has commercial leases and must find methods of limiting casualty liability that are acceptable in those jurisdictions.

A tenant may incur liability to its landlord for casualty damage to the premises or structure under four theories: (1) tort; (2) contract or lease covenant; (3) application of indemnification; or (4) vicarious liability.

[2]—Tort

A tenant's liability will be considered tortious if its negligence or that of its agents or employees, causes the casualty or damage.² Tortious liability arises apart from any lease covenant or other written agreement whereby the tenant assumes this liability. Several cases have held that this liability is not necessarily excused by the landlord's covenant to repair fire damage³ nor by the owner's or landlord's receipt of insurance proceeds obtained at that party's own cost.⁴ The theory applied in these cases is that a tenant's liability is excusable only if (1) the landlord is contributorily negligent; (2) the landlord has agreed in writing or by actions to insure the premises and building on behalf of both the landlord and tenant; or (3) the tenant is able to prove that a substantial portion of the landlord's insurance premiums have been paid for by the tenant or are attributable to payments in operating expenses and other rents made by the tenant.⁵

A plaintiff who sued both his employer and the owner of the office building in which he worked for damages claiming permanent physical injuries as a result of his exposure to mold in the workplace recovered $1.6 million from the building owner under a negligence theory with respect to the premises.⁶ The court held that there was sufficient evidence that the plaintiff's injuries were proximately caused by his exposure to mold.⁷

[3]—Contract or Lease Covenant

Contractual liability arises quite apart from tort liability but may originate from the same events. The tenant's responsibility for fire and other casualty damage may arise from a lease covenant to surrender or "yield-up" possession of the premises in good condition. The covenant may also provide an obligation for the tenant to repair the premises at lease expiration or termination. The covenant is obviously breached if the premises or building are destroyed and cannot be restored in a timely manner.⁸

The parties can allocate the risk of damage and injury and clarify their responsibilities for obtaining insurance to cover the risks. The following provision is an example of one such provision, which clearly allocates the risks and sets forth the insurance obligations of both the landlord and tenant.

The parties desire, to the extent permitted by law, to allocate certain risks of personal injury, bodily injury or property damage, and risks of loss of real or personal property by reason of fire, explosion or other casualty, and to provide for the responsibility for insuring those risks. It is the intent of the parties that, to the extent any event is insured for or required herein to be insured for, any loss, cost, damage or expense, arising from such event, including, without limitation, the expense of defense against claims or suits, be covered by insurance, without regard to the fault of Tenant, its officers, employees or agents ("Tenant Protected Parties"), and without regard to the fault of Landlord, its respective partners, shareholders, members, agents, directors, officers and employees ("Landlord Protected Parties"). As between Landlord Protected Parties and Tenant Protected Parties, such risks are allocated as follows:

(a) Tenant shall bear the risk of bodily injury, personal injury or death, or damage to property, of third persons occasioned by any event(s) occurring on the Premises, provided such event is occasioned by the wrongful act or omission of Tenant Protected Parties.

(b) Landlord shall bear the risk of bodily injury, personal injury, or death or damage to the property of third persons occasioned by any event(s) occurring on or about the Building (other than premises leased to tenants), provided such event is occasioned by the wrongful act or omission of any Landlord Protected Parties.
(c) Tenant shall bear the risk of damage to Tenant's contents, trade fixtures, machinery, equipment, furniture and furnishings in the demised premises arising out of loss by the events required to be insured against pursuant to this Article.

(d) Landlord shall bear the risk of damage to the Building arising out of loss by events required to be insured against pursuant to this Article.

(e) Landlord shall, at its own cost and expense, maintain insurance on the Building against fire and risks covered by "extended coverage" on an "replacement cost" basis or containing a "replacement cost" endorsement in an amount sufficient to prevent Landlord from becoming a co-insurer ("All Risk" coverage). Landlord's insurance shall cover all items of Landlord's Work. Landlord shall also maintain a commercial general liability insurance policy, including contractual liability coverage (or with contractual liability endorsement) on an occurrence basis in amounts not less than Five Million ($5,000,000) Dollars combined single limit per occurrence with respect to bodily injury or death and property damage, to any one person and not less than Five Million ($5,000,000) Dollars with respect to bodily injury or death to any number of persons in any one occurrence and with respect to property damage. Landlord shall name Tenant as an additional insured on such policies and shall deliver a Certificate of Insurance upon Tenant's request. Landlord shall also carry rental value insurance for a loss period of at least One (1) year in an amount equal to the aggregate of all rent and additional rent payable by any and all tenants in the Building. Landlord shall provide Tenant with no less than Thirty (30) days written notice of any cancellation, nonrenewal or material change in coverage.

(f) Tenant shall, at its own cost and expense, maintain insurance on its own furniture, fixtures and equipment in the Premises against fire and the risks covered by "extended coverage" for their full insurable value ("All Risk coverage Special Forms"), minus any applicable deductible(s), but in no event shall Tenant be required to carry plate glass insurance. Tenant, at its own cost and expense, shall maintain a commercial general liability insurance policy, including fire damage legal liability insurance and contractual liability coverage (or with contractual liability endorsement) on an occurrence basis in the amount of not less than Five Million Dollars ($5,000,000) combined single limit per occurrence in respect of bodily injury or death.

[4]—Indemnification⁹

A landlord's or tenant's liability may similarly spring from an indemnification or exculpatory clause in the lease¹⁰ requiring one party to hold the other harmless from casualties caused by the first party, its agents, employees, invitees or third parties. The exculpatory clauses typically protect the landlord from liability to the tenant even for the landlord's own negligence.

The following provision limits the landlord's liability to the tenant for injuries and property damage negligently caused by co-tenants and limits the landlord's liability for injury or damage resulting from landlord's own negligence or tortious acts or omissions and those of its agents, employees and contractors. The provision requires that the landlord make sure that all tenants carry adequate insurance to cover injury and damage. The landlord indemnifies the tenant for any "Liabilities" caused by or relating to the negligent or tortious acts or omission of the landlord, its officers, employees, agents or contractors.

Landlord shall not be liable to Tenant for any personal injury or property damage resulting from the negligence of a co-tenant or anyone else other than Landlord, or for any damage to person or property resulting from any condition of the Premises or other cause, except for such injury or damage that results from the negligent or otherwise tortious acts or omissions of Landlord or Landlord's agents, employees and contractors. However, Landlord shall require all other tenants in the Building to carry reasonably adequate amounts of liability, (including property damage), and fire and extended coverage insurance. Nothing herein, however, shall be construed to relieve Landlord of liability for the negligent or otherwise tortious acts or omissions of its officers, employees, agents and contractors, and Landlord shall hold harmless, indemnify and defend Tenant from and against all claims, demands, suits, causes of action, judgments, damages, losses, costs and expenses (including reasonable attorneys' fees and disbursements) (collectively, "Liabilities"), caused by, arising from or related thereto.

[5]—Vicarious Liability

A tenant may be vicariously liable for any casualty or damage caused by the subtenant, licensee or assignee whose performance the tenant guarantees. Liability has been found under the theory of res ipsa loquitur ("the thing speaks for itself"),¹¹ as well as under the theories of liability discussed above.

[6]—Fraud or Misrepresentation

Absent fraud or misrepresentation, both landlords and tenants have insurable interests in...