The Covenant of Quiet Enjoyment, Part TwoMay 2016 – Commercial Leasing Law & Strategy
Part Two of a Two-Part Article
Although in many states the covenant of quiet enjoyment is implied in a commercial real estate lease, a landlord can limit its responsibilities and reduce its exposure by narrowing the scope of the covenant in the lease agreement.
A landlord can attempt to cap its liability by limiting the type or amount of damages for which it is liable under the lease. These types of limits are not typically found in the quiet enjoyment provision itself, but rather sprinkled throughout the lease or in a specific "limitation of liability" provision. In a 2011 case, Frittelli, Inc. v. 350 North Canon Drive, LP, 202 Cal.App.4th 35 (C.A. 2nd Dist. 2011), a California court affirmed the parties' ability to limit the scope of quiet enjoyment, whether express or implied, and found that the landlord was not liable for a breach where the lease specifically stated that the landlord shall be not liable under any circumstances for any injury or damage to tenant's business or for any loss of income or profit therefrom.
In this case, the tenant argued that the covenant was breached in connection with the landlord's remodeling of the shopping center of which the premises was a part. In addition to the express limitation of liability, the lease also contained a specific provision authorizing future remodeling of the shopping center, which provision also stated that the tenant would not be entitled to any damages for disruption to the tenant's business caused by such remodeling work. The court held that this provision modified the tenant's rights regarding the covenant of quiet enjoyment, and when read in conjunction with the limitation of liability provision, exempted the landlord from the alleged damages in connection with remodeling projects.
Construction and Remodeling
Taking a cue from Frittelli, a landlord can limit its exposure for a breach of the covenant by adding to the lease-specific carve-out language for current construction projects and plans for future remodeling or expansion. To preserve a landlord's ability to access a tenant's premises for purposes of maintaining other tenants' premises or the building as a whole, landlords should also add provisions to the lease reserving to the landlord broad rights to access the premises to install and maintain systems such as plumbing, electrical and HVAC that may be necessary for the building. This right may include entry into a tenant's premises, construction in adjacent premises or a temporary change in the tenant's access to the building or its premises. A landlord should also consider reserving rights with respect to any other reasonable purpose, including, but not limited to, accessing the premises for building inspections, repairs, decoration and other building operations; denying access to the premises for security purposes; and accessing the premises to show the premises to prospective purchasers, lenders and tenants. A tenant is unable to maintain an action for a breach of the covenant if the tenant was aware of the potential interference at the time it entered into the lease. A specific carve-out or lease provision that identifies and acquiesces to the interference can serve as evidence of this knowledge.
Even if a specific disturbance or interference cannot be identified in the lease at the outset, a landlord can limit its liability for a breach of the covenant through an express disclaimer. Tenants and their attorneys should be especially mindful of "as is" clauses, as such clauses may diminish or entirely supersede the covenant of quiet enjoyment absent any language in the lease to the contrary. In 2012, a Georgia court held that a lease provision stating that the premises was leased "as is" trumped the covenant of quiet enjoyment that was both implied by law and expressly stated in the lease agreement. Jaraysi v. Sebastian, 733 S.E.2d 785 (Ga. App. 2012). The tenant alleged that the landlord's failure to install proper lighting in its parking lot led to increased criminal activity, which substantially interfered with the tenant's use of the premises. In light of the lease's "as is" clause, the court found nothing in the lease — including the express covenant of quiet enjoyment — obligated the landlord to provide additional lighting. The court held that a breach of the implied covenant could only be found where the disturbance "amounts in law to an eviction of the tenant …," which was not present in this case.
In addition to anticipating potential interference and limiting a landlord's liability, a landlord can also rely on the covenant being contingent upon the tenant's behavior. For example, in Dance Magic, Inc., et al. v. Pike Realty, Inc., 85 A.D.3d 1083, 1088 (N.Y. App. Div. 2011), the tenant vacated the premises in mid-December 2007 due to persistent leaks and water damage, but had only paid rent through November 2007. The court stated that the tenant must have performed all conditions precedent to its right to rely on the covenant of quiet enjoyment, and in this case, the lease expressly conditioned quiet enjoyment on the tenant's payment of rent while in possession of the premises.
Because the tenant failed to pay rent for the portion of December during which it occupied the premises, the tenant did not satisfy the condition and could not claim a breach of the covenant. Similarly, in Lily, Inc. v. Silco, LLC, 997 N.E.2d 1055 (In. App. 2013), the lease agreement provided that the tenant should peaceably and quietly hold and enjoy the premises "[i]f [t]enant timely pays the rents reserved and performs all of the other terms, covenants and conditions of [the] [l]ease …" Citing this language, the court found that the landlord did not breach the covenant of quiet enjoyment because the landlord's interference occurred only after the tenant stopped paying rent and fell into default.
Determining whether a landlord has breached the covenant of quiet enjoyment will always be a fact-dependent analysis, but there are steps a landlord can take to mitigate its liability. Through astute drafting of the lease agreement, the covenant can be customized to meet the needs and manage the expectations of the landlord and tenant, both by modifying the language of the covenant itself and by crafting specific language throughout the lease that speaks to a landlord's rights and limitations of liability.
Reprinted with permission from the May 2016 issue of Commercial Leasing Law & Strategy. © 2016 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved