In today’s litigious culture, you would think it’s enough for property owners to worry just about risks arising from their own conduct – for example, slip and fall cases, environmental hazards, trespass issues, etc. Do owners really need to worry also about lawsuits because of their tenant’s conduct? Recent trends in case law suggest the answer is yes.
Generally speaking, property owners are only liable for their own actions or inactions. For example, property owners can face liability if they breach an express or implied contract or for their own negligence. But recent cases hold that owners can also be liable for the wrongful conduct of their tenants if the owner knew or should have known of the tenant’s bad acts.
In Omega v. 375 Canal Street, 324 F.R.D. 47 (Dist. S.D. NY 2018), the District Court affirmed an award of liability of $1,100,000 against the property owner due to the illegal acts of its retail commercial tenant. In that case, the evidence demonstrated that the retail tenant regularly sold counterfeit watches to its customers, including knock off Omega watches. Omega discovered the black-market operation when it sent a private investigator into the shop who purchased one of the knock off watches for $80 (a genuine model of the Omega watch can cost up to $20,000).
The evidence at trial showed that the store had been raided multiple times by police for the counterfeit operation, and that the tenant and landlord had been sued before by at least one other vendor concerning counterfeit activity. As a result, the Court found that the property owner was liable for the tenant’s actions due to the owner’s negligent and willful disregard for the tenant’s unlawful conduct.
Other cases around the country support the above theory of vicarious liability against property owners: Hard Rock Café Licensing Corp. v. Concession Services Inc., 955 F.2d 1143 (7th Cir. 1994) (commercial landlord liable for damages due to its willful blindness of its retail tenant’s black market sale of counterfeit clothing); Fonovisa Inc. v. Cherry Auction Inc., 76 F.3d 259 (9th Cir. 1996) (commercial landlord liable for damages arising out of retail tenant’s sale of bootleg music CDs).
To protect themselves, property owners and their property managers should pay careful attention to who they lease their property to. Background checks not only prior to the tenancy, but on an ongoing basis are prudent. And to protect themselves, commercial landlords should include well drafted indemnity agreements in every commercial lease to legally require the tenant to indemnify and hold harmless the landlord if the landlord is ever sued because of the tenant’s conduct.
And finally, commercial property owners should be sure to carry appropriate property insurance, including general liability coverage, as well as umbrella coverage, to insure and defend any potential claims arising from the property.
If you or anyone you know have questions concerning commercial property, contact Mr. Charles At Provident Law. Our real estate attorneys represent parties on either side of real estate and financing transactions, including buyers, sellers, landlords, tenants, lenders, borrowers, trustees, guarantors, shareholders, partners, and others. We advise, structure, negotiate, and document a variety of real estate and financing transactions, including leases, purchase and sale agreements, financing agreements, and development agreements for a variety of commercial and residential projects. Contact us today and learn how we can help.
Christopher J. Charles is the founder and Managing Partner of Provident Law®. He is a State Bar Certified Real Estate Specialist and a former “Broker Hotline Attorney” for the Arizona Association of REALTORS® (the “AAR”). Mr. Charles holds the AV® Preeminent Rating by the Martindale-Hubbell Peer Review Ratings system which connotes the highest possible rating in both legal ability and ethical standards. He serves as an Arbitrator and Mediator for the AAR regarding real estate disputes; and he served on the State Bar of Arizona’s Civil Jury Instructions Committee where he helped draft the Agency Instructions and the Residential Landlord/Tenant Eviction Jury Instructions.
Christopher is a licensed Real Estate Instructor and he teaches continuing education classes at the Arizona School of Real Estate and Business. He can be reached at Chris@ProvidentLawyers.com or at 480-388-3343.