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Case Notes
Exculpatory Clause Bars Tenant's Claim for Lost Profits Resulting from Landlord's Negligence
In a New York commercial tenant's action for a full rent abatement and lost profits, tenant appealed from the New York Supreme Court's grant of summary judgment to landlord. The Appellate Division modified to reinstate the claim for rent abatement, and otherwise affirmed. Chaitman v. Moezinia, NYLJ 12/30/19 (AppDiv, First Dept.)
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.
Even when landlord's negligence causes injury to person or property, General Obligations Law §5–321 does not preclude enforcement of a lease provision requiring a tenant to procure insurance against that negligence, at least if the lease was negotiated by sophisticated parties. In Hogeland v. Sibley, Lindsay & Curr Co., 42 N.Y.2d 153, the Court of Appeals held that a landlord was entitled to indemnification from a tenant for injuries suffered by a third party as a result of the combined negligence of the landlord and tenant. In enforcing the indemnification provision in the lease, the court emphasized that it was considering the indemnification clause against a background in which the parties had mutually agreed to allocate the risk of liability to an insurer, reallocating liability to a third party, while still affording adequate protection to the public. Pointing to several provisions throughout the contract evidencing bilateral participation and equal treatment of both parties, the court concluded that the parties' mutual agreement did not violate §5–321. The court reaffirmed Hogeland nearly 30 years later in Great Northern Ins. Co. v. Interior Const. Corp., 7 N.Y.3d 412, again emphasizing that the parties had used insurance to allocate the risk of liability.
Conversely, where there is a lack of bilateral participation in the negotiation of the lease, the simple inclusion of an insurance procurement provision will not suffice to avoid the prohibition of §5–321. The Second and Fourth Departments have both held that absent clear mutuality, a lessor cannot simply circumvent §5–321 by placing its own burden to procure insurance for its own negligence onto the lessor. In Graphic Arts Supply, Inc. v. Raynor, 91 A.D.2d 827, the Fourth Department held an insurance procurement clause unenforceable where the clause was one-sided and the agreement evidenced a lack of "bilateral participation." In Port Auth. of New York & New Jersey v. Evergreen Int'l Aviation, Inc., 275 A.D.2d 358, the Second Department similarly refused to enforce an insurance procurement clause where the lease "lack[ed] any language to demonstrate a mutuality of intent."
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