General Exculpation Clause can be Enforceable

July 7, 2014

The term exculpation clause is defined as a contract provision that relieves one party of liability if damages are caused during the execution of a contract. These clauses can be very important in real estate transactions, particularly those involving small businesses.

Just a few years ago, in Frittelli, Inc. v. 350 N. Cannon Drive LP, a California court held that in a commercial transaction, a general exculpation clause was enforceable because both sides had opportunity to read and understand the entirety of the agreement and the plaintiff failed to allege extreme conduct on the part of the defendant. In that lawsuit, Frittelli asserted multiple claims based on the theory that Cannon Drive's renovation of a shopping center destroyed Frittelli's business within the shopping center. The trial court ruled in favor of Cannon Drive at the summary judgment stage, and the appellate court affirmed that decision.

Both sides agreed on the key facts in the case. In 2006 the owners of a Beverly Hills shopping center entered into a commercial lease with Frittelli. Frittelli started a gourmet doughnut shop in the center. Shortly thereafter, Cannon Drive became the owner of the entire shopping center.

Many provisions in the lease were important to the Court's decision, but in particular one provision said that the lessor (ultimately Cannon Drive) had authority to remodel the center. This portion of the lease contained a limitation of Cannon Drive's liability for damages caused by any renovations, but provided for an abatement of Frittelli's rent if Frittelli's use of the space was impaired by the renovations. Another portion of the lease relieved Cannon Drive from liability for damages from "conditions arising upon the Premises" and "injury to [Frittelli's] business or for any loss of income or profit therefrom." The lease stated that if Frittelli sustained such damages the only recourse would be from insurance policies Frittelli was required to maintain. Cannon Drive started renovations. Frittelli complained of excess dust, so North Cannon provided cleaning services and offered rent concessions.

Ultimately, the dispute went to court, and the courts sided with Cannon Drive because of the terms in the lease. One of Frittelli's claims was that the general exemption paragraph was unenforceable because it was not sufficiently conspicuous within the lease as a whole. It based this claim on the following:

• The exemption was printed in the same font size as other lease provisions;
• It was in the middle of the lease; and
• The person who signed the lease on behalf of Frittelli stated in a declaration that she was unaware of the exemption when she executed the lease.

The courts rejected this argument. Due to the commercial context of the lease, the appellate court relied on a previous case in so doing. It held that the general exemption was enforceable because the person who signed the lease on behalf of Frittelli had a full and reasonable opportunity to read and understand it. The paragraph in question was not hidden or disguised, is not in smaller font than the rest of the lease, and was captioned in bold print. The lease also included a signed acknowledgment by both parties that they had read and understood the lease. Finally, there was a blocked portion of the lease that advised the parties to seek legal advice before signing. Given all of these facts, the provision was enforceable.

The moral of the story is really in the lease Frittelli's agent signed. When you are negotiating a complex lease for your small business, you should seek the advice of an attorney before signing any documents.