A Presumption of Sophistication

commercial leaseMany first-time small business owners are surprised to find that the high duty of care owed by residential landlords to residential tenants does not apply in a commercial setting. In an opinion published this week, the New Jersey Appellate Division recently reconfirmed this in the case of Vellucci v. Allstate Insurance Company.

In that case, the realty giant Mack-Cali had designed, built, owned, and managed a building in Bridgewater, which is and was occupied by Allstate Insurance. The plaintiff’s father, Albert Vellucci, worked for Allstate in that building and in 2004, at the age of 53, contracted Legionnaires’ disease from the building’s water supply. He was admitted to the hospital on December 14th, but on January 16th, 2005 passed away due to multiple organ failures, caused by the disease. The plaintiff brought suit claiming, among other things, negligence on the part of Mack-Cali for failure to “maintain the building’s water supply and plumbing system in a reasonably safe condition.”

Any residential landlord in New Jersey knows that had this incident occurred in a residential property to a residential tenant, the landlord would most likely be on the hook. However, as the court points out:

[P]revailing industry and regulatory standards do not impose a duty on Mack-Cali to take proactive measures to ensure that a commercial office building’s water supply is not contaminated by the Legionella bacteria. Absent evidence that Mack-Cali actually knew or should have known, through the exercise of reasonable maintenance measures, that the building’s water supply had been contaminated with the Legionella bacteria, Mack-Cali is not liable for decedent’s demise.”

Courts presume in a residential situation that tenants do not have the same ability to thoroughly inspect the property, the sophistication to negotiate the lease, or the negotiating power to insist on revisions. So certain allowances are made in favor of the tenant, such as the implied warrant of habitability, which is read into any lease and requires the landlord to maintain the basic elements and major systems of the premises in safe condition. While there is some movement towards such an implied warranty in commercial leases, most states maintain the old caveat emptor attitude towards commercial property. Business tenants are held to a higher standard and charged with the responsibility to safeguard themselves.

What does all this mean for new business owners? Become a sophisticated business tenant by having your lease reviewed by an attorney with experience in commercial leasing, asking questions and understanding what you are signing before you jump into such an important contract, and using what power you have to negotiate favorable terms.