Don't Bet the Business

I have advocated for years that before signing a commercial lease, both prospective tenants and landlords should have their leases reviewed by a litigation attorney, not simply a business or transactional specialist. 

Transactional attorneys are, by their nature, focused on closing the deal. Litigation attorneys, on the other hand, often see the deal as a problem waiting to happen where drafting weaknesses, particularly in the otherwise innocuous boiler-plate provisions, are left untouched. It is in the boiler-plate that litigation careers can be made.

Take for instance a typical insurance clause – landlords and tenants will each obtain insurance coverage protecting their respective insurable interests. Of course there may be more complicated provisions, but it is common that each side to the commercial lease secure insurance.  So what happens when a tenant fails to obtain insurance, or coverage is mistakenly cancelled for non-payment, and one winter the roof collapses – a roof the landlord controls – causing damage to the tenant’s business?  The tenant can sue the landlord right?  Possibly wrong or very wrong.

In Creative Dental Concepts, LLC v Keego Harbor Development, LLC, Case No. 315117 (June 26, 2014), this very thing happened and one sentence in the insurance boiler-plate clause – “If either party fails to obtain insurance, it bears the full risk of its own loss” was ruled to bar any claim for negligence by the tenant against the landlord for breach of duty to maintain, inspect and repair the roof.  This one sentence, the court reasoned, set forth in clear terms of the parties’ unambiguous decision to bar claims when insurance was not obtained as the lease required.  This particular language may not have been deemed a significant detail given the parties’ clear intent to obtain insurance, but hindsight is 20/20.

There is often a resistance by deal makers to avoid “lawyering up the deal” for fear of scuttling it or making it too complicated or expensive. There can be fair concerns. However, a pre-lease litigation screen might have caught this little gem, and quite possibly avoided for the tenant the loss it must now fully absorb.