Get 5 Key Protections When Transferring Construction Warranties to Tenants

It’s a common scenario that’s likely to arise any time a landlord hires outside contractors to carry out substantial improvements on a tenant’s premises: The tenant requests that the landlord “transfer” any construction warranties that the tradespeople may have given the landlord. The idea behind the request is to ensure that the tenant can call upon the tradespersons who performed the work for the landlord to resolve any defect, substandard condition, or deficiency at their own expense. To execute the strategy, the tenant’s attorney may ask the landlord to “assign” all construction warranties to the tenant.

In concept, that request is one that most landlords would be willing to accept. After all, the tenant should have recourse against tradespeople for shoddy work. However, there are also hidden pitfalls in such an arrangement. The best way to avoid these pitfalls is to ensure that the lease clause requiring you to transfer the construction warranties you receive includes five limitations and/or clarifications. Here’s a look at each of the lease protections you need, along with a Model Lease Clause: Get Protections When Assigning Construction Warranties to Tenants, created and used effectively by a veteran New York City commercial leasing attorney to help you incorporate them into your own construction warranty transfer agreements.

1. Covers Only Assignable Warranties

Not all warranties are assignable. Some warranties may state that they benefit only the landlord, and not any successor or assignee. Even if the warranty isn’t assignable, the landlord might still be in breach of the lease for failing to transfer it to the tenant. That’s why the landlord should promise to transfer not all warranties but only those that are “assignable.”

2. Covers Only Warranties in Writing

Transferring warranties can get tricky if they’re not in writing. Proving the existence of oral warranties is difficult, and actually enforcing their terms is even more problematic. That’s why the lease should limit the landlord’s duty to assign to only “written” warranties [Clause, third line].

3. Transfer Covers Both Warranty Benefits and Obligations

Warranties are often a mixed bag of benefits and liabilities. Accordingly, landlords who are prepared to transfer warranties to tenants should insist that the transfer covers not only the warranty’s benefit in favor of the landlord but also its liabilities, responsibilities, obligations, commitments, and duties. In other words, the warranty’s advantages and disadvantages should be amalgamated and transferred as a single comprehensive package.

4. Landlord Not to Be Held Secondarily Liable

Under basic lease/contract law, when any assignment is made, the assignor remains secondarily liable unless the assignor provides otherwise. Result: If the tradesperson wrongfully dishonors the warranty, the landlord may be held secondarily responsible to the tenant. To guard against this potential for liability, make sure the lease states that the assignment is made “without representation by, warranty from, or recourse against the Landlord.”

5. Tenant Must Pay Warranty Transfer Fees

Construction warranties often require the assignor to pay the tradesperson a fee as a condition of transferring the warranty to a third party. If that’s the case in your situation, you should require the tenant to pay that fee as a condition of your transfer of the warranty to the tenant [Clause, second sentence].