Landlord Wasn't in Joint Venture with Tenant for Liability Purposes

Occasionally, a CRE landlord will choose to be in a joint venture with a tenant, but it’s not typical. Unfortunately, under certain circumstances, someone could try to argue that you are in a joint venture in order to hold you liable for an event or accident. So consider whether you’re inadvertently meeting the joint venture criteria and adjust accordingly if you don’t want to be on the hook for the situation that recently threatened a Mississippi landlord. Although a court ultimately ruled in favor of the owner, protracted litigation is never a good thing, win or lose. 

There, an owner signed a lease for nightclub space with a tenant. Under the lease, the owner was entitled to additional rent under certain circumstances. The owner had no day-to-day supervision over the property or the tenant. After a nightclub customer was attacked by a third party, he sued the owner and the tenant. He claimed that the owner and tenant were both liable for his injuries because they had a duty of care to protect him and other customers. The customer claimed that the owner and tenant “had either actual or constructive knowledge of the third party’s violent nature or actual or constructive knowledge that an atmosphere of violence existed on the premises.”

The owner asserted that it was an “absentee” landlord that had no control or supervision over the space and so it couldn’t be held liable. But the customer argued that, due to the additional rent arrangement in the lease, the owner and the tenant were in a “joint venture” together and so the owner could also be pulled into the lawsuit.

The owner asked a trial court for a judgment in its favor without a trial. The trial court denied its request and ordered a trial. The owner appealed. A Mississippi appeals court reversed the trial court’s decision.

The appeals court disagreed with the customer’s argument that the owner’s contractual involvement with the tenant (under the terms of the lease agreement, which provided the owner with the right to receive additional rent above the base rent based on 6 percent of the tenant’s gross sales and the right to inspect its books and records in order to determine whether additional rent might be applicable) far exceeded the scope of an absentee landlord and essentially made the owner a joint venturer with the tenant.

The appeals court said that this clause doesn’t mean that the owner possessed an element of control over the premises. It said that nothing in the lease agreement “ascribed the possession and control necessary to impute to the landlord the duty to protect the tenant’s invitees from injury at the hands of others.” It noted that, had the customer been injured due to some structural defect on the premises that the owner had covenanted with the tenant to keep in repair, the case might be different.

Here, a percentage-rent clause could not create a joint venture or partnership between the tenant and owner. A joint venture is “an association of persons to carry out a single business enterprise for profit, for which purpose they combine their property, money, effects, skill and knowledge,” explained the appeals court. To form a joint venture, “there must be a joint proprietary interest and right of mutual control.” There was no evidence of such an agreement. The owner didn’t contribute her property or money to promote the tenant. The owner simply leased the property to it under traditional commercial realty methods, which often entail percentage rent covenants. Therefore, the owner owed no duty to protect the customer from reasonable foreseeable injury at the hands of another customer, said the appeals court [Adams v. Hughes, May 2016].