Avoid Liability for Tenant's Losses Beyond Your Control

Struggling retail tenants may be able to blame their business's failure on things like poor sales, inconvenient locations, or unexpectedly high overhead. But occasionally, the owner is blamed for the failure, such as in a recent Maryland case.

In Beasley Food Ventures, Inc., et al. v. AFC Enterprises, Inc. et al., a first-time fast-food restaurant tenant agreed in its sublease with the owner to charge certain menu prices. After the restaurant opened, the tenant wanted to raise the prices. A dispute arose between the tenant and owner as to whether the owner's employees had orally agreed to such a change prior to the execution of the sublease.

After the owner wouldn't allow the change, the tenant sued for fraud. It claimed that the owner had misrepresented whether it would be able to change its menu prices after the restaurant opened, and blamed the downfall of its business on not being able to increase them.

Ultimately, the owner in this case prevailed after a jury trial. To minimize exposure in a suit by a tenant with a similar claim that you adversely affected it, it is crucial to include clear contractual limitations in the lease. To aid the defense in the event of a lawsuit, also include in the lease a jury waiver provision, a clear and concise integration clause, and a limitation on liability and other defensive provisions. We'll tell you about these options and why it is critical to negotiate for them.

Case Overview

Beasley Food Ventures, Inc. was a Church's Chicken franchisee. Beasley had a sublease with BAA Maryland, Inc., the developer of the retail and concession program for Baltimore Washington Thurgood Marshall International Airport (BWI), whereby it would operate a Church's Chicken fast-food restaurant in the AIRMALL, a shopping mall within BWI.

Beasley agreed to “street pricing” in the sublease. “At the AIRMALL at BWI, our model is predicated on street pricing, which means all operators must create a pricing structure for their merchandise that is comparable to retail, food, and beverage units in the local community,” explains Mark Knight, president of BAA Maryland, developers of the AIRMALL at BWI.

“We conduct a thorough auditing process to ensure that the passenger is being charged a fair price for products and services, because to travelers, this is a value proposition. It means they will not be exploited at the airport.” Altering or abandoning this operational principle in any way—even if it offers temporary relief to an operator—would undermine the entire program and run counter to AIRMALL's promise to passengers: “Regular Mall Prices…Guaranteed.” “It's just not an option. That's the way our contracts are built, and that's the way we want to do business,” he emphasizes.

Prior to Beasley and the owner's execution of the sublease, a Church's Chicken located in Philadelphia was chosen as a price model, since it was the closest Church's Chicken location to BWI. Beasley then submitted menu pricing based on the Philadelphia location, which was incorporated into the sublease.

However, after the Church's Chicken opened for business, and Beasley saw other airport subtenants charging menu prices that allegedly yielded higher check averages, it wanted to change its street pricing comparison restaurant to a Roy Rogers or Popeyes—franchises with higher menu prices. Beasley also complained to BAA about struggles that were out of BAA's control. For example, when its franchisor eliminated all pork products from the menu, Beasley said that it was difficult to serve a breakfast menu at 5 a.m.—a requirement under the sublease.

Eventually, Beasley was unable to continue operating. In its lawsuit, it alleged that BAA was responsible for the fact that it had suffered economic losses. BAA's sublease provisions relieved it from liability for Beasley's business failure. Make sure your lease is drafted effectively, too.

Include Three Lease Terms

You should negotiate three options to protect yourself against liability for a tenant's losses that are beyond your control: A jury waiver provision, a clear and concise integration clause, and a limitation of liability provision.

Use precise jury waiver provision. An important issue in the Beasley case was the jury waiver provision in the sublease. It was drafted in such a way that Beasley was able to argue successfully that the provision applied to only collections actions that might be filed by the owner, not the tenant. For example, if Beasley didn't pay rent the action would be tried by just a judge. But Beasley argued that any claim it brought against BAA was not subject to the jury waiver provision. In other words, if Beasley sued BAA, it would be entitled to a jury trial.

Here, the court found that Maryland law narrowly applies jury waivers and favored Beasley on that point. Because the jury waiver provision was not applied, the trial became much more complex and, despite a judgment in the owner's favor, it was more expensive.

“Although there was Maryland case law supporting BAA's jury waiver provision, state laws differ on requirements for an effective jury waiver clause. The lesson is that a jury waiver provision should be very precise to ensure it will be enforced,” says Cathy A. Hinger, an attorney in the Washington, D.C., office of Womble Carlyle Sandridge and Rice, PLLC who worked on the case. “Make sure that the jury waiver provision is broad enough and specific enough to cover not only your claims against your tenant for nonpayment or ejection, but also any outlandish claims the tenant might bring against you,” advises Hinger.

Draft clear and concise integration clause. The integration clause in the Beasley case said that the sublease was the entire agreement and that no other agreements or alterations would be effective unless they were in writing by both parties. Contract language like this is very important because it can settle disputes between an owner and tenant who are saying different things regarding an issue. The Beasley jury felt strongly that if a party has a contract, it should follow it, which is why the clear and concise integration clause was really important to overcoming the fraud claim in the case. All owners should take note of this and draft a clear and concise integration clause to include in their leases.

Negotiate limitation of liability, tenant's risk, waiver of claims provision. Owners can effectively limit their exposure to lawsuits stemming from a tenant's economic loss or total loss of a business if they have a limitation of liability provision in their leases. For an example of a limitation of liability provision you can adapt, see our Model Lease Clause: Add Limitation of Liability Clause to Lease.

After Beasley signed its sublease with BAA, its franchisor came under new ownership that prohibited it from serving its main menu items and made other detrimental changes. “This obviously was completely beyond the owner's control,” notes Hinger. “Having a provision that would protect an owner from liability for economic losses that are caused by a surrounding tenant, competition from other tenants, neighbors, franchisors, or any other problem beyond the owner's control is very important,” she says.

A strong limitation of liability clause in your lease should protect you from liability for the ultimate failure of a tenant's business. “Not all lawsuits can be prevented,” says David Hamilton, the managing member of the Baltimore office of Womble Carlyle Sandridge and Rice, PLLC. “Here, we had two themes: The contract was clear and supported the landlord, and the tenants were liars,” he asserts “The jury agreed with both themes.”

Beasley Food Ventures, Inc. v. AFC Enterprises, Inc. et al., In the Circuit Ct. for Anne Arundel Cty., Maryland, Case No. 07-120078 CN, April 2009.

Insider Sources

David B. Hamilton, Esq.: Managing Member, Womble Carlyle Sandridge and Rice, PLLC, 250 W. Pratt St., Ste. 1300, Baltimore, MD 21201; (410) 545-5850; david.hamilton@wcsr.com.

Cathy A. Hinger, Esq.: Member, Womble Carlyle Sandridge and Rice, PLLC, 1401 Eye St. NW, FL7, Washington, DC 20005-2225; (202) 857-4489; CHinger@wcsr.com.

J.P. Scholtes, Esq.: Associate, Womble Carlyle Sandridge and Rice, PLLC, 250 W. Pratt St., Ste. 1300, Baltimore, MD 21201; (410) 545-5870; jp.scholtes@wcsr.com.

Sidebar

Keep Documentary Record of Negotiations

In Beasley Food Ventures, Inc., et al. v. AFC Enterprises, Inc. et al., the tenant alleged that certain promises had been made orally by the owner's employees prior to the execution of the sublease. To avoid disputes over statements that either party to a lease or sublease may or may not have made in the past, J.P. Scholtes, an attorney in the Baltimore, Md., office of Womble Carlyle Sandridge and Rice, PLLC, recommends memorializing as much of your lease negotiations as possible in writing.

“If you are an owner negotiating with a tenant, those negotiations are better served in a written format,” he advises. If you meet someone in person, always memorialize the conversation in writing so there is no misunderstanding, and save any emails. “A documentary record of what really happened back in the lease negotiation stage gives you evidence to prove your case if you have to go to trial,” he says.

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