Chapter 22 - § 22.6 • LIMITATIONS ON LIABILITY

• Jurisdiction: Colorado

§ 22.6 • LIMITATIONS ON LIABILITY

§ 22.6.1—Limitation on Landlord's Liability

It is increasingly common for leases to contain a provision limiting the landlord's liability under the lease to the landlord's equity in the building. These clauses became common after the real estate debacle of the 1980s (repeated in 2001 and 2008) when many landlords were bankrupted or lost their properties (or both) as a declining market caught up with overly leveraged real estate. The landlords continued to be personally liable to tenants under their leases, even though they no longer owned the property. To avoid a repeat of these problems, many landlords seek to limit the tenant's recourse against the landlord to the landlord's equity or interest in the building. In addition, landlords often limit recourse against any of their principals and provide that they are relieved of any liability under the lease once they transfer the building to someone else.

Recourse Only to Equity or Interest in the Building

The landlord's equity in the building is the difference between the fair market value of the building and the amount of indebtedness secured by the building. The amount of equity will constantly change as (1) the fair market value of the building fluctuates according to the market, and (2) the debt is reduced by payments of principal and increased through financing and refinancing.

In another version of this type of recourse limitation, the tenant will be limited to recourse against the estate of the landlord or the landlord's interest in the property. As a practical matter, this limitation is the same as a limitation against the landlord's equity. If a judgment is rendered against the landlord, the tenant ultimately will be able to access the income from the property, but any indebtedness secured by the property and any prior liens will have priority. The income from the sale will be applied, and the property will be sold subject to these prior rights. In a sale of the property, the most the tenant ever will be able to recover is the landlord's equity in the property.

How does the tenant evaluate such a limitation? The tenant's nightmare is the cash-strapped landlord who fails to deliver services (or delivers them poorly) and against whom the tenant has no viable remedies because the remedies are either prohibited by the lease (rent offset, rent abatement, self-help, or lease termination) or have become meaningless because the landlord has no equity in the building...