Commercial leases typically contain provisions to protect landlords from damages suffered by tenants as a result of any condition of the leased premises or the common areas. A recent Indiana case illustrates that there are some limitations on the protections a landlord may believe it enjoys as a result of including such a provision in its lease with a tenant.
In Meridian North Investments, LLC v. Anoop Sondhi DDS, MS, the landlord had originally entered into a lease with Anoop Sondhi, D.D.S., M.S., P.C, which was a professional corporation operated by Dr. Sondhi. Through a series of lease renewals, the tenant became Sondhi-Biggs Orthodontics, P.C. The lease contained a provision obligating the landlord to make reasonable efforts to maintain and repair the common areas, including snow removal. The lease also provided that “in no event shall Landlord be liable for damages . . . due to any failure to furnish, or any delay in furnishing, the foregoing services.”
The lease also contained a typical exculpatory clause:
Landlord’s Non-Liability. Landlord shall not be liable to Tenant, or any other person in the Leased Premises or in the Building by Tenant’s consent, invitation or license, express or implied, for any damage either to person or property sustained by reason of the condition of the Leased Premises or the Building, or any part thereof, or arising from the bursting or leaking of any water, gas, sewer or steam pipes, or due to any act or neglect of a co-tenant or other occupant of the Building or other person therein, or due to any casualty or accident in or about the Building.
Dr. Sondhi was injured when he slipped and fell on a patch of ice outside the office building. He sued the landlord, alleging that it had been negligent in failing to keep the common areas of the building free from ice. The landlord claimed that the exculpatory clause shielded it from liability.
In declining to overturn the trial court’s denial of the landlord’s motion for summary judgment, the Court of Appeals acknowledged that Indiana law allows parties to a commercial lease, where there is equal bargaining power, to allocate risks and burdens and permits the inclusion of exculpatory clauses to absolve a landlord of liability to a tenant for the landlord’s own negligence. However, the Court of Appeals also noted that third persons who are not parties to or privy to a contract containing such exculpatory provisions are not bound by the contract. The Court of Appeals stated “Thus a third party injured upon the premises might properly recover against [a landlord] for [the landlord’s] negligence”.
Indiana cases have established the principle that third parties are not bound by the lease contract and the exculpatory provisions in the contract, but the Court of Appeals recognized that those cases did not involve a situation where the injured person executed the lease in his capacity as a representative of a corporation. The court then chose to follow a century-old New York case in holding that, while Dr. Sondhi executed the lease, the lease exclusively governs the business relationship between Meridian North and Sondhi Briggs Orthodontics, P.C., which is a legal entity separate from Dr. Sondhi. The Court of Appeals rejected the landlord’s arguments that the court should pierce the corporate veil and hold that the corporation is not truly separate from Dr. Sondhi. As a result, the Court of Appeals held that the landlord failed to establish that Dr. Sondhi was effectively the tenant under the lease and was personally bound by the exculpatory provisions.
While it is important for landlords to include such exculpatory provisions in their leases and for tenants to understand the effect of such provisions, it is also important for landlords to recognize the limitations on such provisions. If shareholders, members, officers, employees and other individuals who may have a relationship with the tenant suffer injury or damage as a result of the landlord’s negligence, the exculpatory provisions agreed to by the landlord and the tenant in the lease are not likely to protect the landlord against claims made by such individuals.
By: George H. Abel, II
Indiana Court of Appeals Holds that a Construction Manager did not Owe a Duty to a Plumber’s Employee Injured on the Project
Facts: In Daniel Lee and Hui Luo Lee v. GDH, LLC, a plumber was severely injured when a gas line exploded while performing an air test on a gas line on a building project at Ivy Tech. GDH’s contract with Ivy tech required that it would provide recommendations and information regarding the allocation of responsibilities for safety programs among the contractors, review the safety programs developed by each of the contractors, coordinating the safety programs, and various other safety duties.
However, GDH’s contract also provided that its responsibilities for coordination of safety programs shall not extend to direct control over or charge of the acts or omissions of the Contractors, Subcontractors, agents or employees of the Contractors or Subcontractors, or any other persons performing portions of the Work and not directly employed by GDH.
Lee sued several parties involved in the project including GDH claiming it was responsible for Lee’s injuries.
Decision: The Indiana Court of Appeals affirmed the trial court’s decision for Summary Judgment finding that GDH had no duty of care toward Lee.
The court held that GDH “contractually disclaimed any responsibility for the safety of contractors’ employees and specified that contractors would be responsible for administering safety programs in connection with their portions of the project,” Senior Judge John Sharpnack wrote. “Based on the plain language of the contracts at issue, GDH did not contractually assume a duty of care for the employees of contractors. Rather, the contractors were responsible for the safety of their employees.”
The court also went on to hold that the fact that GDH had a safety coordinator for the project and held weekly meetings did not expand its duties because those tasks fell under its contractual duties with Ivy Tech and did not indicate that it assumed additional duties.
A note to take from this case is that if you are acting as a construction manager, make sure your contracts contain language that precludes liability for the safety of contractor’s and subcontractor’s employees on the project. It is always a good idea to contact your attorney to make sure you have the proper provisions included in your contracts.
By: Roy Rodabaugh
On May 5, 2014, Greg Easter was admitted to practice law in the State of Florida after having successfully passed the Florida Bar Examination. Congratulations to Greg.
As drilling for petroleum products in the Midwest becomes more prevalent than it has been for decades, existing oil and gas leases will become more valuable to the holders of those leases. Even though an owner’s property may appear to be burdened by an oil and gas lease, a recent Indiana case shows that such leases may terminate if the lessee fails to abide by all of the terms of the lease.
In L.C. Neely Drilling and Maverick Energy, Inc. v. Hoosier Energy Rural Electrical Cooperative, a predecessor of Maverick Energy had entered into an oil and gas lease with the owner of a large tract of land in Sullivan County. The lease, as amended, provided that the lease would last for a period of five years and would continue after that period as long as gas was being produced and sold from the land. However, if no gas production royalties were being paid at the expiration of thirty-six months after the commencement of the lease, the lease would continue from year to year upon payment by Maverick Energy of advance royalty payments equal to $5 per acre; such advance royalty payments were due within thirty days after expiration of the 36-month period and on each anniversary of the expiration of that 36-month period.
As of January 2012, no production royalties had been paid, and Maverick Energy did not pay the required advance royalty payment by the January 3 deadline that year. In late January 2012, Maverick Energy sent a check to Hoosier Energy for the advance royalty payment. Hoosier Energy returned the check and notified Maverick Energy that the gas and oil lease had terminated because the advance royalty payment was not timely.
The trial court granted Hoosier Energy’s motion for summary judgment, thereby ruling that Maverick Energy’s lease had expired. In reviewing Maverick Energy’s appeal of the ruling, the court of appeals examined the differences between “drill or pay” provisions and “unless” provisions in oil and gas leases. If a lease contains a “drill or pay” provision, the lessee must commence production or pay advance royalties, but the failure to do one or the other is only a breach of the lease and not a cause for automatic termination of the lease. If a lease contains an “unless” provision, the lease will terminate automatically unless the lessee either commences production or pays the advance royalties by the prescribed date.
Since Maverick Energy’s lease stated that the lease would continue only if Maverick Energy paid the advance royalty payments by the date required, the court of appeals found the parties’ intention to be that the lease would terminate if Maverick Energy failed to comply with the requirements for continuation of the lease. Maverick Energy’s failure to make the required payment by the prescribed date resulted in a termination of the lease–and not a default under the lease which Maverick Energy could have cured within thirty days after notice.
It is important for both the holders of oil and gas leases and the owners of property burdened by the leases to be aware of the specific provisions in such leases. Depending on the circumstances, it is possible that an owner of a property burdened by an oil and lease may not have to honor that lease if the lessee has failed to abide by the terms of the lease. Owners and lessees under oil and gas leases should also be aware of the provisions of Indiana Code §32-23-8, which permits the property owner to void oil and gas leases after a period of one year has elapsed since the last payment of rentals or operation for oil or gas have ceased.
By: George Abel
Indiana Court of Appeals: Contractor’s Failure To Comply With Home Improvement Contracts Act Precluded Recovery of Attorney’s Fees
In First Response Services, Inc. v. Vincent A. Cullers, the Indiana Court of Appeals denied a contractor’s argument that even though it failed to comply with the Home Improvements Contact Act (“HICA”) it should still be entitled to recover its attorney’s fees under the contract.
Facts: The Cullers hired First Response to perform water restoration services when their sump pump malfunctioned and caused their basement to flood. First Response removed the wet carpet and provided several pieces of drying equipment in the basement. After several days, the Cullers demanded the drying equipment be removed and offered to pay $1,200 for the services. First Response demanded $7,722 for the work performed.
Prior to starting the work, First Response had the Cullers sign two documents, which failed to meet the requirements of HICA. The documents failed to include a reasonably detailed description of the proposed home improvements, the home improvement contract price, and the start and completion dates.
First Response filed a complaint for breach of contract and unjust enrichment and for its attorney’s fees. At trial, the court found that First Response was entitled to $3,780 in damages, but it was not entitled to recover its attorney’s fees.
Decision: The Indiana Court of Appeals affirmed the trial court’s decision. The court found that the purpose of HICA is to protect consumers by placing specific minimum requirements on the contents of home improvement contracts because few consumers are knowledgeable about the home improvement industry; and the contractor therefore is held to a strict standard. The court opined that it cannot have been the intent of the legislature to allow a company to circumvent the strict requirements of the statute. Because the contractor failed to comply with the requirements of HICA, First Response was not entitled to recover attorney fees pursuant to the terms of the contract.
By: Roy Rodabaugh
In a recent case examining a contractual waiver of subrogation, the Indiana Court of Appeals adopted the “majority approach” in concluding that an owner waived its right to subrogate any and all claims covered by its property insurance.
Facts: Jefferson County entered into a contract with Teton Corp. to renovate a building. The AIA contract required Jefferson County, as owner of the project, to obtain a separate property or builder’s risk insurance policy for the project, while Teton was to obtain contractor’s liability insurance. The county did not obtain the additional insurance and relied on its existing property and casualty insurance.
Subsequently, a fire during construction caused approximately $6 million in damages. The county’s general insurance policy did not cover all of the damages, and the county sued Teton to recover damages. Teton defended by arguing that the waiver of subrogation clause prevented the county from recovering damages e caused by the fire. Jefferson County argued that under the contract, Teton was responsible for procuring insurance to cover damages for claims “other than to the Work.”
Decision: The Indiana Court of Appeals followed the “majority view” which rejects the “work” verse “non-work” approach. The court held that using the “minority view” and differentiating between “work” and “non-work” would “throw many projects into protracted litigation, possibly even years after project completion and acceptance.”
The Court of Appeals held:
The AIA contract expressly requires property owners to separately insure these interests and, in order to facilitate the completion of the project without delaying and debilitating litigation, to obtain an ‘all-risk’ insurance policy that waives the carrier’s rights to be subrogated to any loss arising within the extremely broad coverage described in the contract. If the owner does not secure such insurance, then it still waives its subrogation rights for any loss described within the AIA contract that it sustains.”
A lesson to take from this case is to make sure you understand your contractual insurance requirements. It is always a good idea to contact your insurance agent or attorney to make sure you have the proper insurance in place. Waiver of subrogation claims are more prevalent in construction contracts and its vital you understand what you are waiving.
By: Roy Rodabaugh is an attorney focusing in the area of construction law
By: George Abel
Many landlords lease space to Indiana governmental agencies, including offices for the Family and Social Services Administration, Indiana Department of Veteran’s Affairs facilities, Bureau of Motor Vehicles branches, etc. This is becoming ever more prevalent as agencies seek to maintain the flexibility to close and/or consolidate offices as tax revenues (and their budgets) shrink; leasing space instead of owning real property helps governmental agencies maintain such flexibility.
However, leasing to such agencies creates its own set of challenges, even for landlords who may believe they are receiving the benefit of leasing to a good credit tenant thatwill always pay the rent on time. In this regard, landlords should be aware that leases with such agencies almost always contain a provision that, even though the lease may be for a specified number of years, the agency has the right to terminate the lease on relatively short notice if appropriations are not made for continued operation of the location. In addition, rent is paid by such agencies in arrears, rather than being paid in advance each month (such advance monthly payments are standard in other commercial leases), and the landlord’s remedies may be limited to preclude the landlord from accelerating rent in the event of a default by the tenant. Such provisions are contained in leases with governmental agencies because such agencies cannot pay for goods or services until the goods or services are actually provided.
One common provision in many commercial leases has been the source of some confusion in the past when leasing to governmental agencies. Many commercial leases require tenants to pay their share of real property taxes, either the amount of the actual taxes attributable to the leased property or the amount of any increase in such taxes above a certain amount; even where tenants are not expressly required to pay such real property taxes, the estimated amount of such taxes is included in the rental rate.
Under Indiana Code Sec. 6-1.1-10-2, property owned by the state, a state agency, or the BMV is exempt from real property taxes. Landlords have also been successful on some occasions in receiving an exemption from real property taxes for property leased to state agencies (and even for local governmental agencies), although the authority for such exemptions has been somewhat unclear. The granting of such exemptions was sometimes based on the rationale that requiring governmental agencies to pay real property taxes which may be a source of funding for that agency was, in effect, the agency paying itself in a roundabout way, while placing the burden on the county to assess the property and collect the taxes.
Commencing January 1, 2014, property leased to a state agency is exempt from real property taxes under certain specific circumstances. Indiana Code Sec. 6-1.1-10-2 has been revised to provide that real property leased to a state agency is exempt from real property taxes if the agency is obligated under the terms of the lease to pay real property taxes. If a state agency leases less than all of a parcel of real property, the exemption will be a partial exemption. It is important for landlords to specifically provide in any lease with such agency that the agency will be obligated to pay real property taxes.
By: Mike Cavosie
Indiana employers: Do not assume that your non-compete agreements are enforceable. The September 30, 2013, Indiana Court of Appeals decision Joseph M. Guinn v. Applied Composites Engineering, Inc. dramatically highlights the perils of doing so.
In that case, Guinn, who held an FAA airframe and powerplant mechanic’s license, worked for Applied Composites as an airline mechanic. Applied Composites made all of its employees execute non-compete agreements, and Guinn was no exception.
When Guinn tendered his two-week notice to start working for AAR Aircraft Services, a customer and vendor of Applied Composites, Applied Composites repeatedly threatened to sue both Guinn and AAR. AAR initially hired Guinn but terminated his employment shortly thereafter because of the pressure from Applied Composites. Nevertheless, Applied Composites filed a lawsuit against Guinn for breach of the non-compete agreement and against AAR for tortiously interfering in the employment relationship between Applied Composites and Guinn.
Guin filed a multiple-count counterclaim against Applied Composites. Count II of the counterclaim alleged that the non-compete agreement was unenforceable. Count III of the counterclaim alleged that Applied Composites had tortiously interfered in the employment relationship between Guinn and AAR.
Critically–and unsurprisingly–the trial court held that the non-compete agreement was overbroad and unenforceable. Indiana courts have long stated that covenants which restrict a person’s employment opportunities are strongly disfavored and will be strictly construed. Foremost among the requirements for a valid, enforceable non-compete agreement is an employer’s legitimate protectable interest. A legitimate protectable interest is “an advantage possessed by an employer, the use of which by the employee after the end of the employment relationship would make it unfair to allow the employee to compete with the former employer.” Proprietary methods, confidential pricing, certain types of customer lists–these are examples of a protectable interest. General knowledge, information or skills gained by anemployee in the course of employment are not protectable interests.
During a hearing, Applied Composites admitted that the only interest Applied Composites had in Guinn was “investment and costs in the training.” Such interests are clearly insufficient under Indiana law to support a non-compete agreement.
(As an aside, employers should generally not have all employees sign non-compete agreements. Instead, non-compete agreements should be reserved for key employees who will, through their course of employment, garner specific information and knowledge that would allow them to unfairly compete after termination of the employment relationship.)
However, the trial court granted Applied Composites’ motion for summary judgment on Count III, Guinn’s tortious interference claim. One of the elements in a tortious interference claim is whether the interference is justified. Enforcement of a valid non-compete agreement is justified; enforcing what turns out to be an invalid non-compete may not be justified. The trial court noted:
In this case, ACE’s Non-Compete Agreement had legal defects when it was signed by Guinn; however that fact was unknown to ACE at the time. The question of whether or not the contract was enforceable had not yet been tested in a court of law. [Applied Composites] had reason to believe that Guinn was, in fact, acting in violation of said non-compete agreement.
Guinn appealed that decision (Applied Composites did not appeal the trial court’s decision that the non-compete agreement was unenforceable), and the Indiana Court of Appeals reversed. In remanding the case to the trial court for a jury trial, the Court of Appeals noted that Applied Composites’ only asserted interest in Guinn was investment and costs in the training. It continued:
The factfinder may consider the extent to which the terms, conditions, and covenants contained in the Agreement were unreasonable, overly broad, or not narrowly tailored to protect ACE’s legitimate business interests and the extent to which this factor may weigh in favor of a finding that ACE’s conduct was justified or unjustified under the specific circumstances in this case.
And therein is the cautionary tale. Not only was the non-compete unenforceable, but Applied Composites now finds itself the defendant in a jury trial with the possibility of paying damages to a former employee.
By: Mike Cavosie
In a decision that will certainly be appealed, on September 5, 2013, Lake County Superior Court judge John M. Sedia held that Indiana’s Right-to-Work Law violates the Indiana Constitution. The lawsuit challenging the law was brought by Local 150 of the Operators union.
Local 150 alleged four distinct constitutional violations:
1. violation of Article I, Section 1, which declares that all people are created equal, by compelling Local 150 to bear the entire cost of representing non-members;
2. violation of Article I, Section 9:, which guarantees the right of free speech, by requiring Local 150 to divert resources to represent non-members that it could otherwise use for protected speech.;
3. violation of Article I, Section 24, which generally prohibits laws with certain types of retroactive effect, by applying to existing collective bargaining agreements; and
4. violation of Article I, Section 21, which declares that no person’s services shall be demanded without just compensation, by requiring Local 150 to serve non-members.
Judge Sedia dismissed the first three alleged violations but held that the law violated Article I, Section 21. He first noted that, under Federal labor law, Local 150 is required to represent non-members: Thus:
In the absence of the federal law, a union could, without incurring any criminal liability under [the Right-to-Work Law], refuse to provide services for those employees who chose not to join the union; in the absence of the [Right-to-Work Law], the union could insure that it received compensation in the form of dues for the services the federal law required it to perform from those employees who chose not to join the union though a collective bargaining agreement with the employer that made the payment of dues to the union a condition of employment.
Judge Sedia noted his strong antipathy to declaring any state statute unconstitutional, but he concluded:
However, the effect of [the Right-to-Work Law] under the current, long-standing federal labor law, is to demand particular services without just compensation. The Court therefore has no choice but to find that [provisions of the Right-to-Work Law] violate Article I, Section 21 of the Indiana Constitution.
By: Mike Cavosie
Affordable Care Act (“ACA”) amendments to the Fair Labor Standards Act (“FLSA”) require covered employers to provide each employee a written notice regarding the ACA. The notice deadline is October 1, 2013, and employees hired after that date must be provided the notice at the time of hiring.
The FLSA generally covers employers who are engaged in, or produce goods for, interstate commerce, of not less than $500,000. The Department of Labor explains that the ACA notice must inform the employee:
- of the existence of the Marketplace (referred to in the statute as the Exchange) including a description of the services provided by the Marketplace, and the manner in which the employee may contact the Marketplace to request assistance;
- if the employer plan’s share of the total allowed costs of benefits provided under the plan is less than 60 percent of such costs, that the employee may be eligible for a premium tax credit under section 36B of the Internal Revenue Code (the Code) if the employee purchases a qualified health plan through the Marketplace; and
- if the employee purchases a qualified health plan through the Marketplace, the employee may lose the employer contribution (if any) to any health benefits plan offered by the employer and that all or a portion of such contribution may be excludable from income for Federal income tax purposes.
Model notices drafted by the Department of Labor can be found here: Department of Labor ACA Resource Page