In my career as a business attorney, I’ve focused my practice in two areas: commercial real estate and litigation. A recent opinion of the North Carolina Court of Appeals, Morrell v Hardin Creek, piqued my interest since the case marked an intersection between my two favorite areas of the law. The Morrell case should serve as a cautionary tale to all who are involved in commercial leasing transactions that it is crucial to draft your commercial leases with absolute clarity (and hire an attorney who proofreads!).
The lawsuit stems from a lease dispute for a food production facility in the mountain town of Boone between a tenant pasta company and its commercial landlord for water damage caused by frozen pipes in cold January weather.
The tenant was a successful, growing company that provided fresh pasta to grocers across the Carolinas. Shortly after the lease term commenced, the North Carolina Department of Agriculture inspected the facility and notified the tenant that the state’s commercial food production standards required certain modifications to the facility. After negotiations related to the required modifications, the parties agreed to extend the lease for an additional five years. In exchange, the landlord paid for and performed the required modifications to the facility.
A short time after the construction was completed in the kitchen and pasta-drying rooms, a cold front overtook Boone, causing frozen pipes connected to the sprinkler system. As a result, the building suffered tens of thousands of dollars in damages from flooding. A dispute quickly arose as to liability for the damage between which culminated in a lawsuit between the parties in which both parties asserted claims for damages and asserted that the other party caused the flooding.
Ultimately the case was decided based on an interpretation of the following portions of the lease pertaining to alterations of the premises and insurance requirements of the parties:
(b) Tenant’s Neglect. Subject to the provisions set forth in the following sentence, Tenant shall pay for the cost of any repairs or damage resulting from negligence or the wrongful acts of his employees, representatives or visitors. However, and notwithstanding any other provision of this lease to the contrary, Landlord and Tenant and all parties claiming under them agree and discharge each other from all claims and liabilities arising from or caused by any hazard covered by insurance on the leased premises, or covered by insurance in connection with the property owned or activities conducted on the leased premises, regardless of the cause of the damage or loss, provided that such cause does not prevent payment of insurance proceeds to Landlord under the provisions of the applicable policy.
- Insurance: Tenant shall maintain insurance in accordance with the provisions of subparagraphs (a) and (b) of this paragraph, and Tenant shall indemnify Landlord in accordance with the provisions of sub-paragraph (c).
(a) Property Insurance: Tenant shall hold Landlord harmless for loss or damage by fire with regard to all of Tenant’s furniture, fixtures, and equipment about or within the leased premises.
(b) Liability Insurance: Tenant shall provide and keep in force for the protection of the general public and Landlord liability insurance against claims for bodily injury or death upon or near the leased premises and the sidewalks, streets and service and parking areas adjacent thereto to the extent of not less than $500,000.00 in respect to bodily injuries or death to any one person and the extent of not less than $500,000.00 for bodily injuries or death to any number of persons arising out of one accident or disaster, and property damage with limits of not less than $100,000.00. The Tenant shall furnish Landlord with satisfactory evidence of such insurance within thirty (30) days of execution of this lease.
Despite the fact that there is a reference to a Section 8(c) of the lease in the relevant excerpts listed above, there was no Section 8(c) of the lease.
Following a hearing on the landlord’s motion for summary judgment seeking dismissal of plaintiff’s claims, the trial court concluded that the language of Section 5(b) “is not ambiguous and is a complete defense to the claims in the Complaint.” The trial court granted summary judgment in favor of the landlord on all of the tenant’s claims. The tenant timely appealed the decision to the North Carolina Court of Appeals, arguing that the language in Section 5(b) was ambiguous.
The North Carolina Court of Appeals reversed the trial court and remanded the case for further proceedings. The Court concluded that when taken in its entirety, the lease was ambiguous. In its analysis of those relevant portions of the lease, the Court held that the lease created ambiguity as to the type of insurance required of the tenant and noted that the two sections seemed to conflict as to the meaning of “hazard covered by insurance.” The Court also noted the fact that the reference to a missing Section 8(c) of the lease further added to the ambiguity, which entitled the tenant to reversal of the trial court’s dismissal of its claims.
This case is a strong reminder of some key points to consider when dealing with commercial leases (or any contract for that matter):
- Shorter is not always better: Oftentimes, a client or opposing party will comment that a lease is “too long” or “too complicated.” While a longer lease might seem overwhelming or just an excuse for your attorney to use more “lawyer speak,” they often provide more guidance and specificity for the parties. The importance of such specificity can help to avoid a dispute similar to the one in Morrell. I suspect that the landlord in the Morrell case wishes those sections of the lease which formed the basis for the decision were more specific and clear.
- Proofreading is worth the time and money: It is important to thoroughly proofread the final version of the lease prior to execution: Any mistakes or ambiguities that are the result of an oversight or a typographical error, such as references to sections that are not included in the document, can create devastating consequences on the parties. Trust me, it is worth the money to have your attorney proofread it one more time!
- Clarity in insurance provisions is extremely important: Insurance coverage can be one of the most complicated aspects of commercial leasing. As the Morell case illustrates, the lease should be absolutely clear about the type and amount of insurance the parties must carry as well as the rights and responsibilities of the parties in the event of damage. It is important to consult with your insurance provider in connections with any commercial leasing negotiations.
If you are pursuing a commercial lease, either as a tenant or landlord, we can help you understand your rights and responsibilities, as well as ensure your interests are protected and terms effectively negotiated to drive your business forward. Contact me at the Forrest Firm today to get started.