Case Notes

The lease provided that if more than 30% of the premises is damaged and the premises cannot be opened for business to the general public, all rent would be abated until the premises can be opened for business. The lease also provided that "notwithstanding anything to the contrary … Tenant waives, to the full extent permitted by law, any claim for consequential or punitive damages in connection [with damage to Tenant's property.]" Finally, the lease also required landlord to use reasonable efforts to minimize inconvenience, annoyance and injury to the tenant's business and its use of the demised premises. The landlord allegedly performed negligent renovations to the premises that permitted tenant to remain open for its existing clients, but precluded tenant from accepting new clients. The tenant brought this action for a rent abatement and lost profits, but the Supreme Court granted summary judgment to landlord.

In modifying, the Appellate Division held that issues of fact about the percentage of the premises affected by the renovations precluded summary judgment on the claim for a full rent abatement. But the Appellate Division held that the exculpatory clause barred the tenant's claim for lost profits. The court rejected the tenant's argument that General Obligation Law section 5-321, which invalidates agreements exempting landlord from liability for negligence causing injury to persons or property. Invalidating the exculpatory clause in this case, the court distinguished lost profits from injury to property and held that the statute did not apply to lost profits. Moreover, the court concluded that the lease's "reasonable efforts" provision did not override the exculpatory clause.

Analysis

New York courts consistently hold that lost profits due to business interruption do not constitute property damage under General Obligations Law §5–321. In Periphery Loungewear, Inc. v. Kantron Roofing Corp., 190 A.D.2d 457, the First Department held that an exculpatory clause releasing the lessor from liability for certain business injuries did not violate §5–321. In interpreting §5–321, the court found that "from the perspective of insurance coverage, the concept of business interruption loss is one wholly distinct and separate from property damage." In Duane Reade v. 405 Lexington, L.L.C., 22 A.D.3d 108, the court upheld an exculpatory clause in holding that tenant was not entitled to recover lost profits resulting from the landlord's construction activity. Because the tenant's damages were simply "lost customer transactions" and not injury to person or property, the court concluded that §5–321 did not apply.