Does Allocation of Risk Work in Your Favor?

Does Allocation of Risk Work in Your Favor?

While it’s important for tenants to comply with maintenance requirements for their space, if your or your contractor’s shoddy workmanship leads to repairs or improvements damaging the premises, you won’t want to be on the hook. The way that risk of loss for certain types of damages is allocated in the lease could determine who is obligated to take care of the damage.

That was the situation in a recent case in Kansas where a lease excused a tenant from liability for fire. There, a dry cleaning business in a shopping center incorrectly installed commercial dryers in its space without using a professionally trained installer. It vented the dryers into the attic instead of to the building’s exterior. The shoddy installation later caused a fire. The center’s owner sued the tenant for negligence and breaching its lease by taking actions that damaged the center. The tenant asked a district court for a judgment in its favor without a trial. The district court ruled in favor of the tenant. The owner appealed.

A Kansas appeals court upheld the decision of the district court in favor of the tenant. The appeals court noted that the case turned on how the owner and tenant allocated the risk of loss for fire damage to the property in the lease. Based on the terms of the lease, it determined that the tenant should be absolved of liability for its careless conduct resulting in the fire that substantially damaged the premises.

Two lease provisions precluded the owner from recovering. One specified that the tenant had a duty to return the premises to the owner “in good order and condition” at the conclusion of the term “damage by fire, tornado or other casualty and the elements only excepted.” The second stated that the owner would maintain casualty insurance for which the tenant would pay a proportionate share of the premiums. The appeals court agreed with the tenant’s assertion that those provisions place the risk of loss from fire—and the obligation to insure against that risk—on the owner [TMD Southglen II, LLC v. Parker, May 2014].