Generally, California law treats parties to a commercial lease as sufficiently sophisticated, equal bargainers, capable of negotiating an agreement governing their relationship, such that it should be enforced and not disturbed by the courts.  Building on this principle, commercial lease parties are permitted to negotiate and allocate who should bear the risk of economic loss in the event of particular mishaps and may even agree to limit liability for breaches of covenants in the lease.  However, those limits have limits, as recently discussed in a case called Epochal Enterprises, Inc. v. LF Encinitas Properties, LLC.

In Epochal Enterprises, the Court held that a lease provision prohibiting landlord’s liability for the tenant’s lost profits was unenforceable, because the provision was against public policy and sought to shield the landlord from liability for violations of statutory law.

Facts of Epochal Enterprises, Inc. v. LF Encinitas Properties, LLC

In 2012, LF Encinitas Properties, LLC (“the Landlord”) purchased real property containing dilapidated commercial greenhouses “as is,” knowing the greenhouses contained asbestos and lead paint.  Over time, the Landlord remediated several of the buildings as they became vacant but failed to remediate a building known as “Range 9.”

In 2014, the Landlord showed the property to potential tenant Epochal Enterprises, Inc. dba Divine Orchids (“the Tenant”).  Throughout the lease negotiation and execution process, the Landlord never mentioned, warned about, or discussed asbestos with the Tenant.  Ultimately, the Tenant signed an “as is” lease agreement with the Landlord to lease Range 9.  The lease contained a provision seeking to limit the Landlord’s liability under the lease in several key respects.  One specific provision stated:  “Landlord shall in no event be liable for any consequential damages or loss of business or profits and Tenant hereby waives any and all claims for any such damages.”

In the Spring of 2016, a storm damaged Range 9 and caused a steam pipe to become dislodged and spray inside the greenhouse.  After the pipe was repaired, debris remained in the greenhouse which later tested positive for asbestos.  The Tenant vacated the premises, abandoned its orchid plants, and sued the Landlord for economic damages, including for its orchid inventory.

At trial, the jury awarded the Tenant $144,300 in “lost profits” and $77,700 in “other past economic loss.”  The Landlord filed a motion asking the Court to enter a judgment in its favor notwithstanding the jury’s verdict based on the lease’s provision limiting liability.  The trial court agreed with the Landlord and overturned the jury’s verdict, concluding it was barred by the limitation of liability clause in the lease.

The Tenant appealed.

Court of Appeal:  Reversed; Limitation of Liability Provision Unenforceable

On appeal, the appellate court reversed the trial court’s decision.

While the Court recognized the broad rights of parties to a commercial lease to agree to their own lease terms, including limiting liability for specified breaches of the lease or related damages, those contracting rights have limits.  Citing Civil Code section 1668, the Court explained that provisions seeking to limit liability are unenforceable if found “to exempt anyone from responsibility for his [or her] own fraud, or willful injury to the person or property of another, or violation of law, whether willful or negligent” when public policy considerations or a violation of statutory law is involved.

As relevant here, California’s Health and Safety Code placed various disclosure responsibilities on the Landlord related to disclosing the existence of asbestos, which were violated.  The lease’s limitation of liability provision sought to exempt the Landlord from responsibility for the Tenant’s economic damages stemming from the Landlord’s violation of the statutory law’s asbestos-related disclosure requirements.  Thus, the Court concluded the limitation on liability was unenforceable.

Lessons

Typically, California courts allow commercial landlords and tenants to negotiate the terms of their own relationship and will honor the terms of the parties’ agreement as written.  However, as the Epochal Enterprises, Inc. v. LF Encinitas Properties, LLC case shows, provisions seeking to limit liability under a lease agreement is one of the few areas where courts may scrutinize the parties’ agreement and strike down certain provisions.  Landlords and tenants should be aware that they cannot utilize a lease to shield themselves from liability for fraudulent or willful actions which violate public policy or statutory law.

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