Must Landlord Pay for IAQ Improvements Required for Tenant’s Proposed Use?

SITUATION: Just before the pandemic hit, a landlord agreed to lease one floor and the basement of a three-story building previously used for warehousing to a lumber and leather goods store. Although the landlord had to shutter the property temporarily, the deal remained on track. Now the landlord has gotten official permission to reopen, and the tenant is prepared to move in. But there’s one catch: To convert the premises to retail use, all three stories and the basement must be refitted to prevent COVID-19 infection via installation of an elaborate air-circulating system.

After crunching the numbers, including the costs of retaining a certified industrial hygienist to certify the system, the landlord concluded that it could make more money by leaving the entire building the way it is and leasing all of the space for warehouse use. So, the landlord dragged its feet on the improvements, hoping the tenant would get discouraged and go away. The tenant recognized that it was being strung along and sued the landlord for breaching its lease obligation to make the premises suitable for retail purposes.  

The key lease provision:

Section 5. Use and Maintenance: Tenant shall use the Premises for the sole purpose of office, warehouse storage, retail sales, and refurbishing lumber and old goods. Tenant shall be responsible for all improvement to the space to be utilized to meet occupant’s needs and requirements to code by state and local city government.” (Emphasis added.)

QUESTION: Did the landlord violate the lease?

A.            Yes, because the duty to make the premises suitable for retail use is implied by Section 5.

B.            No, because the lease makes the tenant responsible for all improvements.

C.            Yes, because landlords are solely responsible for COVID-19 prevention improvements.

D.            No, because the lease doesn’t expressly say the landlord is responsible for making the premises suitable for the tenant’s use.

ANSWER: A. The landlord’s failure to make the premises suitable for retail use was a violation of its implied duty under Section 5.

EXPLANATION: Commercial buildings and centers in this country weren’t designed with social distancing and virus prevention in mind. As a result, significant renovations and retrofitting may be necessary for commercial properties to reopen and remain open in the COVID-19 era. This scenario, which is based on an actual case involving more conventional improvements (specifically, a sprinkler system), illustrates the factors affecting a landlord’s liability to tenants for failing to make required COVID-19 renovations.  

Of course, as in any other commercial leasing dispute, the number one factor will be what the lease does and doesn’t say. The starting point was Section 5 describing the tenant’s use, which the court reasoned, carried an implied duty that the landlord would deliver the premises in condition suitable for that use. So, A is the right answer.

WHY WRONG ANSWERS ARE WRONG

B is wrong because the lease makes the tenant responsible for improvements only to “the space to be utilized”—that is, the first floor and basement. But getting the space ready for retail required building-wide improvements. And while the landlord could hold the tenant responsible for COVID-19 costs associated with the first floor and basement improvements, it couldn’t stick the tenant with the entire bill.

C is wrong because, like any other renovations, responsibility for COVID-19 improvements to leased property is subject to negotiation between the parties. The agreement in this case was that the tenant would be on the hook only for the part of the premises it utilized.

D is wrong because landlords have a fundamental duty to deliver leased premises in a condition that’s suitable for a tenant’s proposed use. That duty doesn’t have to be spelled out in the lease; on the contrary, what does have to be spelled out is an agreement relieving the landlord of liability for not delivering the premises in tenantable condition. The lease in this case included no such language.