Who Is Responsible for Property Damage Under a Commercial Lease?

February 27, 2013

If you run a small business, such as a retail store or restaurant, it's important to understand all terms of your California commercial lease. Do not treat a commercial lease like you would an apartment rental agreement. For one thing, you have to consider issues of liability that might arise if your inventory or equipment become damaged.

Consider the case of Linda Xiang, owner of Geolin Trading, Inc., in El Monte, California, which leased commercial warehouse space from Kenny Luc. Just over two years into the lease, a sprinkler system installed in the warehouse went off after coming into contact with a rolling door. Geolin employees were unable to shut off the sprinklers, and the resulting flood destroyed over $422,000 worth of inventory. Geolin and Xiang then sued Luc for negligence and breach of contract.

Before this incident there had been no reported problems with the warehouse's sprinklers. And in fact, Luc had the system inspected at his own expense about a year before the flood took place. After the flood, Geolin hired its own inspector, who offered a professional opinion that (1) the sprinkler should have been further away from the door that hit it and (2) the sprinkler valves should have been accessible to Geolin employees to prevent flood damage.

The lease between Geolin and Luc contained two key passages. The first said that by taking over the premises, Geolin acknowledged the warehouse was in "good order and repair" and that it was Geolin's responsibility, not Luc's, to make any necessary repairs. This includes any repairs to the sprinklers. The second key clause said Luc was not responsible for any damage to Geolin's property that might occur on the premises. Based on these two provisions, a trial court ruled for Luc on summary judgment and dismissed Geolin's lawsuit.

On appeal, a three-judge panel of the California Court of Appeals agreed that Luc could not be held liable for breach of contract. California law generally only holds a landlord responsible for dangerous conditions that cause personal injury, not damage to property. For example, if the warehouse itself was physically damaged or deteriorated to the point where a Geolin employee suffered a physical injury, the landlord might be responsible no matter what the lease provides. But when it comes to personal property like business inventory, California law leaves it up the landlord and commercial tenant to work those issues out for themselves.

Even the lease, however, does not shield a landlord from damage arising from negligence. In this case, the Court of Appeals said there were still questions to be resolved about Luc's conduct. Specifically, whether he was negligent in not moving the sprinkler further away from the door and in not providing Geolin with ready access to the shutoff valve. Thus, the case may go to trial on Geolin's negligence claim, but not on breach of contract.

The above case-which should not be considered a statement of binding law-illustrates just one potential pitfall of commercial leasing. These are complex transactions that require the services of an experienced Sacramento business attorney. Whether you're a small business owner looking to protect her personal property or a landlord seeking to avoid costly litigation, it's essential to engage a competent attorney before entering into any commercial leasing arrangement.