Tenant Agreed to Owner's Exculpatory Clause in Lease

Facts: A clause in a lease between a retail tenant and shopping center owner generally exempted the owner from liability and stated that an insurance claim was the tenant's sole recourse for the owner's negligence. Another paragraph specifically precluded the tenant from suing the owner for damages arising out of any remodeling that might take place at the center, but provided for abatement of a portion of the rent under that circumstance.

The owner later remodeled the center in several phases. The tenant alleged that it had lost business as a result of the renovation of the center and should, therefore, be able to exercise its right to rent abatement. It sued the owner, which asked a California superior court for a judgment in its favor without a trial. The owner argued that the remodeling project didn't entitle the tenant to withhold a portion of its rent.

The court granted the owner's request, ruling that the tenant's claims against the owner for: (1) breach of a commercial lease; (2) breach of the implied covenant of quiet enjoyment; (3) negligence; and (4) rescission of the lease were barred by the exemptions from liability that the owner had carved out for itself in the lease. The tenant appealed.

Decision: The appeals court upheld the decision of the lower court.

Reasoning: The appeals court agreed with the superior court that, although California public policy disfavored exculpatory agreements, the general exemption from liability in this particular lease barred the tenant's covenant-based claims and its ordinary negligence claim because both parties intended to exempt the owner from liability for such claims.

The general exemption in the lease was “sufficiently visible” and “encompassed damages arising from active negligence,” noted the court. It pointed out that there was no proof of “active negligence” or other behavior on the owner's part that was inconsistent with the owner's obligation in the lease to complete the renovations at the center in a “reasonable and efficient” manner, as stated in the paragraph containing the specific exemption—which the appeals court construed as an obligation not enforceable through a damages claim by the tenant. In light of undisputed evidence that the owner mitigated the project's effects on the center as much as it was feasible to do so, the tenant had no issues that required a jury or further proceedings to determine regarding the owner's alleged negligence or other claims against it.

In its decision, the appeals court emphasized that a tenant to a commercial lease may agree to limit the scope of the covenant of quiet enjoyment, whether express or implied, as well as the implied covenant of fair dealing. It stated that courts in past cases have upheld lease terms that exempted an owner from liability arising from its own conduct, as well as lease terms that limited the tenant's remedies for breach of the covenant of quiet enjoyment. It specified that, ordinarily, California law invalidates contracts that purport to exempt an individual or entity from liability for future intentional wrongs and gross negligence. Furthermore, state law prohibits contractual releases of future liability for ordinary negligence when the public interest is involved or a statute expressly forbids it. And even when exculpatory clauses that purport to exempt a party from liability for ordinary negligence have no impact upon the public interest, they are strictly construed against the person relying upon them, in this case, the owner of the center.

However, whether an exculpatory clause covers a given case turns primarily on contractual interpretation, and it's the intent of the parties as expressed in the agreement—here, a lease—that should control the outcome. “When the parties knowingly bargain for the protection at issue, the protection should be afforded,” concluded the court. “This requires an inquiry into the circumstances of the damage or injury and the language of the contract,” said the court, which pointed out that, as a result, each case, including this one, is fact-specific.

Frittelli, Inc. v. 350 North Canon Drive, LP, December 2011