Lease Provisions to Protect Landlords From Liability May Fall Short

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