Legal Briefs
Disclosure Duty
What information should landlords provide?
By Michael C. Patton |
Do you have to tell your
commercial tenant that its space is in a flood plain? The opinion of the U. S.
District Court for the Middle District of Tennessee is that under Tennessee
law, you do not. While this ruling was made under Tennessee law, the Court
relied on general principles of law as articulated in decisions by courts in
other states. As a result, the decision is good news for commercial landlords
across the country.
The Flood
On May 1, 2010, rain began
to fall in the Nashville, Tenn., area. Before the rains stopped the next day,
some areas of the Nashville basin had received more than 17 inches of water. On
May 3, 2010, the Cumberland River ultimately crested at 51.86 feet in
Nashville, almost 12 feet above flood stage, the highest recorded crest in 140
years.
The Federal Emergency
Management Agency defines a flood as “a general and temporary condition where
two or more acres of normally dry land or two or more properties are inundated
by water or mudflow.” The Army Corps of Engineers determined that the May 2010
flood in the Nashville area “was a 1,000-year flood — an event that could be
expected to happen once in every 1,000 years on average.”
The property damage from
the May 2010 flood was extensive. According to Nashville’s planning and codes
department, private property damage exceeded $2 billion. In downtown Nashville,
which is located high above the normal river level, the floodwater “inundated concert
halls, honky-tonk bars and the city’s arena and even left water hip-pad deep on
LP Field, the home of the NFL’s Tennessee Titans,” according to the New York
Times.
Once the floodwaters
receded, the owners of the damaged property began to file claims under their
insurance policies. Since many policies exclude damage from flooding, only
those property owners with flood insurance had covered claims.
While the need for flood
insurance may have been obvious to those occupying property near a river or stream
such as the Cumberland, the May 2010 flood was a 1,000-year event. Many of the
properties that were damaged were not obviously within the flood plain of the
Cumberland River. Additionally, many occupants of those properties did not own
the premises. Instead, they leased the properties. As such, they may never have
considered the need for flood insurance.
The Case
One lessee that did not
have flood insurance and claimed to have suffered more than $300,000 in damages
contended that its landlord should have warned it that the leased premises were
in a flood zone. In Airpro Systems, Inc., f/k/a Airpro Systems, LLC v. Prologis
North Carolina Limited Partnership, the U. S. District Court for the Middle
District of Tennessee rejected that contention in an opinion that was
subsequently affirmed by the U. S. Court of Appeals for the Sixth Circuit.
In doing so, the Court
focused on three clauses that were in the lease — which should be included in
every commercial lease:
• an “integration clause that indicates no representations or
promises, other than those contained within the [l]ease, have been made between
the parties;”
• a clause disclaiming any warranty or representation as to the
suitability of the premises for the tenant’s business; and
• a clause requiring the tenant to maintain all risk property
insurance.
In light of the Airpro
decision, a landlord in Tennessee generally does not have to inform a
commercial tenant that the leased property is prone to flooding. A landlord,
however, has to answer truthfully questions about whether the property is in a
flood plain.
The absence of a duty to
disclose that a property is in a flood plain would also apply to other
information that a prospective tenant could learn through the due diligence
process. The prospective tenant has to ask about potential issues or exercise
its own due diligence. The landlord only has to respond truthfully when
specifically asked. (The one caveat to the Court’s ruling is that it only
applies to misrepresentation claims. Under Tennessee negligence law, the
landlord has a duty to disclose to the tenant an unsafe or dangerous condition
of which it is aware.)
Landlord Lessons
What are the lessons that
a landlord should learn from the Airpro decision? The first is the importance
of the three clauses which the Court cited in its opinion: the integration
clause, the clause disclaiming any warranty of suitability and the clause as to
maintaining all risk property insurance. This first lesson is now supported by
a decision applying Tennessee law, but it is based on cases from other states.
As a result, the utilization of these clauses would protect commercial
landlords in other jurisdictions.
One potential addition to
the insurance clause would be a specific reference to flood insurance. Most lenders
require flood insurance for loans in which real property secures the
indebtedness. There is no comparable requirement in a lease transaction, and
many less sophisticated lessees may never consider the need for flood
insurance.
The second lesson is always
to answer any questions from a prospective tenant truthfully. That lesson is
applicable in any state and in any context.
Michael C. Patton, a
shareholder in the Memphis office of Baker Donelson, concentrates his practice
in business and commercial litigation. Contact him at
mpatton@bakerdonelson.com.