When Tenants Sue Landlords for Millions and Succeed, What are your Options?

July 27, 2015

When a building owner leases premises to a tenant, it takes the risk that those using the premises may suffer injuries or damage. The possibility of the tenant or others suing the landlord is always present. Two landlords in particular found out just how real that possibility is.

In June 2015, a balcony broke off of the side of an apartment building in Berkeley, California. The 13 people on the balcony at the time plunged five stories. Six young people, five of them students from Ireland, died from their injuries. Seven others suffered serious injuries.

Due to the ages of the victims and the traumatic nature of the accident, the building owner and its contractors will likely face lawsuits seeking millions of dollars in damages. A similar collapse occurred in 1996 at a San Francisco apartment complex, killing one and injuring 14. The landlord paid $13.5 million to settle the ensuing lawsuits.

The owner of the Berkeley building will probably have some legal liability for the accident. The amount will depend on how much of the blame shifts to the contractor who built the complex. Suppose, however, that the total damages were $20 million (the 1996 settlement increased to 2015 prices), and the landlord and contractor share liability 50-50. That still leaves the landlord liable for $10 million.

In another case, a Rhode Island manufacturing building burned down. The manufacturer had sold the complex the year before but continued operations in one building under a lease with the new owners. The sales agreement required the manufacturer to maintain the building.

Several months after the sale, underground pipes feeding the automatic sprinkler system sprung leaks. A bitter cold snap the next month froze pipes and the system's pump. The tenants reported the problem to the landlord's maintenance man, who promised to make repairs. The landlords received a few thousand dollars for the damage from their insurance company. However, only a few hundred dollars of repairs were made.

The building caught fire in the spring, and the water in the sprinkler system lasted 20 seconds. The manufacturer lost all of its machinery, equipment and inventory. It eventually became insolvent. The sole stockholder sued the landlords for, among other things, failing to maintain the sprinkler system. The landlords pointed to the sales agreement's requirement that the tenant maintain the building.

However, the trial and appellate courts awarded hundreds of thousands of dollars in damages to the manufacturer. The courts noted that the sprinkler system was part of the premises under the landlords' control. They also found that the landlords had voluntarily agreed to fix the problem. The courts said that the failure to repair the sprinkler system, when the landlords knew the tenant's operation was particularly vulnerable to fire damage, showed a lack of reasonable care. Finally, they concluded that an operable sprinkler system would have contained the fire with minimal damage.

In both of these cases, the landlords were liable for millions of dollars at today's prices. This shows how vital it is for landlords to carry large amounts of liability insurance, including umbrella policies. Short of not having enough coverage, a building owner would either have to pay this out of pocket, sell the building or sell other assets. Bankruptcy is also an option, but the Landlord will still have to liquidate the assets to pay the debtors, including the injured parties. Disaster may be unlikely, but lots of insurance is essential if it happens.

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