Creating certainty in the inherent uncertainty of the future is the name of the game when it comes to drafting commercial leases. When courts overrule provisions that the parties to the lease have agreed upon, however, that supposed certainty goes out the window. This fact pattern played out recently in Epochal Enterprises, Inc. v. LF Encinitas Properties, LLC (4th Dist., Case No. D079905) (“Epochal”), when the California Court of Appeal ruled that a limitation of liability clause in a lease that purported to release the landlord from liability for failing to disclose asbestos was against public policy and not enforceable.
At play in Epochal, the tenant leased commercial property from landlord with multiple dilapidated commercial greenhouses that contained asbestos and lead paint, which were not identified by landlord. The tenant later defaulted on the lease. After being evicted, the tenant proceeded to file a lawsuit against its former landlord based on harm suffered by tenant due to the failure to disclose the on-site asbestos and lead paint. At trial, landlord pointed at the limitation of liability clause in the lease as its basis for denying any claim for lost profits or other economic loss. Under the lease, the tenant had also waived all claims for consequential damages or loss of business or profits. After the trial court granted the landlord’s motion for judgment notwithstanding the verdict after the jury found the landlord liable[1] for premises liability, negligence and concealment and awarded the tenant damages for lost profits and other past economic loss. The former tenant appealed, and Court of Appeal reversed. The Court acknowledged that, while a limitation of liability is generally enforceable, such language is voided when the result is a violation of California public policy. Specifically, the Court relied on Civil Code section 1668 in invalidating the limitation of liability language in this case, based on the owner’s failure to disclose the environmental hazards when required to do so by the Health and Safety Code. Therefore, the Court found that, despite the lease language suggesting otherwise, landlord was liable for violating the Health and Safety Code by failing to disclose the existence of asbestos.
Epochal is notable because, in general, California courts have approved contractual limitations of liability, and such clauses have become commonplace in commercial leases. California courts have ruled that such clauses can protect even a wrongdoer from liability. However, Epochal informs future commercial lease parties that when exculpatory provisions attempt to shield a party from tort liability, the public policy trump card referenced in Section1668 applies – “all contracts which have for their object, directly or indirectly, to exempt anyone from responsibility for his [or her] own fraud, willful injury to the person or property of another, or violation of law, whether willful or negligent, are against the policy of the law” – and the limitation of liability language can ultimately become unenforceable.
This decision also highlights the basis for disagreement among the courts. The trial court interpreted the “violation of law” prong set forth in Civil Code section 1668 to protect the public interest and injuries to persons, and not designed to prevent “two equal bargainers” in a commercial setting from allocating risk of economic loss. The Court disagreed, emphasizing contrary precedent that found “the Legislature has determined that the information should be made available [all marker participants, including sophisticated business entities] in order to promote informed choice in the free market and in the development of sound public policy.”
In the never-ending quest to capture certainty in commercial leases, the inclusion of a limitation of liability clause remains a useful catch-all despite the ruling in Epochal. However, landlords cannot rest on their laurels in relying completely on their limitation of liability language, but should rather increase their diligence to ensure that no violation of law (especially a violation of the Health and Safety Code) defeats their lease protection. Meanwhile, tenants with leases that contain limitations of liability have new life if they can prove a landlord is in violation of other statutory requirements, or perhaps a violation of some other law that implicates public policy.
The leasing subject matter most directly put on alert by Epochal are environmental issues not being disclosed by landlords. In the court’s eyes, whether it be asbestos or lead paint, the age old argument of a “violation of public policy” is still worth protecting, and the end result can be a limitation of liability language in a lease becoming no limitation at all.
FOOTNOTES
[1] The jury necessarily found the landlord in failing to disclose the existence of asbestos under a negligence per se theory.