In Duane Reade v. Reva Holding Corp., Duane Reade's store at 749 Broadway in Brooklyn, New York, suffered a bit of a setback when construction work performed by the building's owner caused water pipes to freeze and burst, leading to substantial business interruption and property-damage claims. When the chain later filed suit, the New York County Supreme Court dismissed Duane Reade's case on the grounds that the lease "exculpated" or released the landlord from liability for the incident. On appeal, the Appellate Division, First Department, reversed.
The appellate court found support for its decision in various provisions of the parties' lease, including paragraph 47, "Tenant Insurance Coverages," which provided as follows:
47. TENANT INSURANCE COVERAGES - Effective as of the commencement date and thereafter throughout the term of this lease, Tenant, at its sole expense, shall maintain in full force and effect with insurance companies licensed to do business in the State of New York, the following insurance:
(i) (A) Comprehensive general liability insurance for bodily and personal injury and property damage occurring on or about the demised premises ....
(B) Fire and extended coverage insurance (contents broad form) on Tenant's personal property located in the demised premises in amounts reasonably deemed adequate by Tenant to fully insure such personal property.
* * *
(J) Waiver of Subrogation. Neither Owner nor Tenant shall be liable to the other for any business interruption or any loss or damage to property occurring in the building (including the demised premises), or in any manner growing out of or connected with the Tenant's use and occupation of the demised premises, the building or condition thereof, whether or not caused by negligence or other fault of the Owner or Tenant or their respective agents, employees, subtenants, licensees or assignees. The release in favor of Owner and Tenant contained herein, is in addition to, and not in substitution for, or in dimunition [sic] of the hold harmless and indemnification provisions hereof.
Since subrogation is premised upon a party procuring insurance, and permits the insurer to stand in the shoes of the insured in the event damages are sought to be recovered from the wrongdoer, the Appellate Division did not believe that the cited provision prevented Duane Reade from suing its landlord for its business-related losses. As the court observed:
Contrary to defendants' argument, article 47 (i) (J) does not bar any part of this action because the lease does not require Duane Reade to fully insure itself against the business interruption and property damage losses for which it seeks recovery, and Duane Reade's insurance in fact does not cover such losses ... [A]rticle 47 (i) (J), as a waiver of subrogation clause, does not preclude a suit to recover losses for which Duane Reade has not purchased, and was not required by the lease to purchase, insurance coverage.
Despite language in the printed form of the lease which provided for "no diminu[tion] of rental value and no liability on the part of Owner by reason of inconvenience, annoyance, or injury to business arising from Owner ... making or failing to make any [building related] repairs, alterations, additions or improvements," the court also examined a rider provision (Article 84) which warranted that landlord would not "unreasonably interfere with the operation of Tenant's business;" language which was interpreted to allow the chain to pursue the recovery of damages triggered by the owner's conduct.
And, finally, the court examined the third and final "exculpatory" provision which read, in part, as follows:
Owner may during the progress of any work in the demised premises, take all necessary materials and equipment into said premises without the same constituting an eviction nor shall the Tenant be entitled to any abatement of rent while such work is in progress nor to any damages by reason of loss or interruption of business or otherwise.
Reading the language literally, the appellate court concluded that this paragraph did not encompass work performed to the building's roof, since that area was not part of the "demised premises" leased to the tenant.
Clearly, Duane Reade v. Reva Holding Corp. stands for the proposition that exculpation clauses will be subject to strict construction and, in the absence of appropriate waiver or release language, tenants will be permitted to seek the recovery of business losses from their landlords.
For a copy of the Appellate Division's decision in Duane Reade v. Reva Holding Corp., please click on the following link: http://www.nycourts.gov/reporter/3dseries/2006/2006_04921.htm