Actions Can Have Consequential Damages

In Epochal Enterprises, Inc. v. LF Encinitas Properties, LLC, WL 358231 (2024), a recent decision from the California Court of Appeal for the Third District, the court held that a commercial tenant could be awarded consequential damages despite the fact that the lease included a provision explicitly waiving tenant’s right to this type of recovery.  The court reasoned that the limitation of liability clause was void as contrary to public policy to the extent it sought to shield the landlord from liability for its violations of law. 

The tenant in this case, Epochal Enterprises, Inc., dba Divine Orchids, entered into a lease with the landlord for one of landlord’s several commercial greenhouse structures.  Although the landlord was aware that the greenhouse contained asbestos and lead paint, the landlord failed to disclose these conditions to the tenant, believing that such disclosure was not necessary because the lease contained some general hazardous materials language. However, disclosure is required under California’s Health & Safety Code. 

Following a storm that damaged the greenhouse, the landlord voluntarily contracted an asbestos remediation company to complete repairs, despite the lease stating that the tenant would be responsible for all repairs.  After the repairs, the tenant discovered some remaining debris that contained asbestos and lead paint.  The property was then quarantined by the county, resulting in the loss of all of the tenant’s inventory of orchids, exceeding $300,000.  The tenant subsequently filed an action based on the landlord’s non-disclosure and sought to recover consequential damages including its lost business profits.

The landlord argued that the lease terms protected it from liability under the circumstances.  Specifically, the lease included a limitation of liability clause which stated that the tenant waived all claims for consequential damages or loss of business profits.  It also contained an indemnification provision which shielded the landlord from liability other than for gross negligence or intentional misconduct, which landlord claimed did not occur.  The jury rejected these arguments and found in favor of the tenant, awarding it $222,000 in total damages.  However, the trial court judge reversed the jury’s award, holding that the terms of the lease barred the tenant from receiving monetary damages.  The tenant appealed.

The Court of Appeal overturned the trial court’s decision, ruling that the jury’s award supported a finding of landlord’s gross negligence, thereby negating landlord’s protection under the indemnity clause.  The court also ruled that the clause waiving tenant’s right to consequential damages would not shield the landlord from the tenant’s claims for such damages if these claims resulted from a violation of law.  The court explained that parties to a commercial lease may agree to limit liability for breaches of the lease, but that under Civil Code section 1668, a provision which attempts to exempt a party from liability for its own fraud, willful injury, or violation of law is void as contrary to public policy (note that gross negligence is not listed).  Here, the waiver of consequential damages clause in the lease was void and unenforceable because the landlord was attempting to use it to shield itself from liability arising from its failure to disclose asbestos at the premises which was a violation of law.  Thus, the tenant was able to recover its consequential damages despite the waiver in the lease.  Interestingly, the Court of Appeal seemed to suggest that the waiver of consequential damages may have been enforceable and would have protected the landlord if its conduct merely amounted to gross negligence without it also being a violation of law.  In that case, the landlord may have been liable for some direct damages but not consequential damages.  

This decision is a reminder to landlords of the paramount importance of making full disclosures of all matters that are legally required to avoid violating the law and voiding valuable protections within a lease.

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