About half of the roughly 5.6 million commercial buildings in the United States were built before 1980, back when asbestos and lead paint were ordinary building materials.[1] Landlords in that half sign leases every week with exculpatory clauses and waivers of consequential damages in them, on the assumption that the clauses cap what a tenant can ever recover. A California appellate decision that CRE counsel are still working through says the cap comes off the moment the landlord’s conduct violates a disclosure statute.[2]
A limitation of liability clause allocates risk between contracting parties. It cannot exempt a landlord from tort liability created by breaking a law, because California Civil Code section 1668 voids any contract that purports to exempt anyone from responsibility for their own fraud, willful injury, or violation of law. A landlord who fails a statutory disclosure duty has no cap.
The landlord knew what was in the buildings before the tenant arrived. LF Encinitas Properties leased two dilapidated commercial greenhouses to Epochal Enterprises, an orchid grower doing business as Divine Orchids. The landlord had known the structures contained asbestos and lead paint since buying the property two years earlier, and knew it when the lease was signed. It did not tell the tenant.[2][3]
The repairs made a latent hazard an active one. After storm damage, the landlord carried out repairs on the greenhouses without disclosing the hazards or handling them as hazardous material. The County of San Diego eventually quarantined the premises over friable asbestos, which ended the tenant’s ability to grow and sell anything there.[2][3]
California puts the disclosure duty in a statute, not in the lease. Health and Safety Code section 25359.7 requires an owner of nonresidential real property who knows of a release of hazardous substances on the property to give written notice to a buyer, lessee, or renter. Failing that duty is not just a bad fact at trial. It supplies negligence per se, which is a tort claim that exists independently of anything the lease says.[2][3]
The trial court enforced the cap and was reversed. The jury found for the tenant on premises liability and negligence while rejecting its fraud and concealment claims, and the trial court then granted judgment notwithstanding the verdict for the landlord, relying on the lease’s waiver of all claims for consequential damages, loss of business, and profits, together with a jury finding of ordinary negligence. The Court of Appeal reversed on both halves: the jury instructions had told the jurors the landlord bore no responsibility unless it was grossly negligent, committed fraud, or intended harm, so an award of damages necessarily carried a finding of gross negligence, and the indemnity clause carved out gross negligence by its own terms.[2][3]
The line the court drew is between covenants and torts. Parties remain free to limit liability for breaches of their agreement. What they cannot do is contract out of liability for a tort that arises from violating the law, which is why the consequential damages waiver could not reach a claim founded on the landlord’s failure to comply with the Health and Safety Code.[2][3]
The pattern is the one from the warehouse where a bankrupt tenant left a 55-gallon drum of hazardous material behind, viewed from the start of the tenancy instead of the end of it. In both cases the lease language looked decisive and the outcome turned on a body of law sitting outside the lease. Environmental obligations are the clearest example in commercial leasing of terms that a clause cannot fully allocate, no matter how the clause is worded.
Knowing which of your leases rely on a cap that will not hold#
Acrebase extracts limitation of liability, indemnity, exculpatory, and environmental disclosure provisions across a portfolio and flags the ones that carve out gross negligence, the ones that purport to waive consequential damages without qualification, and the leases where no hazardous materials representation was made at all. For a landlord with pre-1980 assets, that inventory identifies which buildings need a disclosure before the next lease is signed rather than after a regulator arrives.
If you are a landlord, disclose known hazardous substances in writing at signing and keep proof of it, because that duty comes from statute and your form lease cannot waive it. If you are a tenant, do not read a consequential damages waiver as the end of your remedies where the landlord withheld something a statute required it to tell you, and build your record around the statutory duty rather than around fraud, which juries are reluctant to find.
Footnotes
[1] US Energy Information Administration, 2012 Commercial Buildings Energy Consumption Survey, Building Stock Results — 5.6 million commercial buildings comprising 87 billion square feet of floorspace, with about half of buildings constructed before 1980. https://www.eia.gov/consumption/commercial/reports/2012/buildstock/
[2] Epochal Enterprises, Inc. v. LF Encinitas Properties, LLC, 317 Cal. Rptr. 3d 573 (Cal. Ct. App., 4th Dist., Div. One, Jan. 31, 2024), No. D079905 — reversing judgment notwithstanding the verdict for the landlord, holding that a waiver of consequential damages cannot shield a landlord whose negligence arises from violating Health and Safety Code section 25359.7, and that the jury’s damages award necessarily reflected a finding of gross negligence excluded from the indemnity clause. https://law.justia.com/cases/california/court-of-appeal/2024/d079905.html
[3] Atkinson, Andelson, Loya, Ruud & Romo, “Recent Court of Appeal Decision Shows the Limits of Exculpatory Clauses in Commercial Leases, Including Limitation of Damages Provisions” — on the asbestos and lead paint at the leased greenhouses, the County of San Diego quarantine, the jury’s findings, and Civil Code section 1668. https://www.aalrr.com/Business-Law-Journal/recent-court-of-appeal-decision-shows-the-limits-of-exculpatory-clauses-in-commercial-leases-including-limitation-of-damages-provisions
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