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Designer License Holding Company, L.L.C. v. The Resource Club, Ltd.

A-2526-08T2 (N.J. Super. App. Div. 2009) (Unpublished)

LEASES; SUBLEASES; EXCULPATION — Exculpatory clauses in commercial leases are enforceable if they do not involve an inequality of bargaining power and do not affect the public interest and a subtenant has no greater right to make a claim against its master landlord than does its sublandlord.

A subtenant executed a sublease for retail warehouse space. The sublease contained the following “exculpatory clause”: “In no event shall either party to the Sublease be liable to the other under any theory of tort, contract, strict liability or other legal or equitable theory for any lost profits (excluding rent or damages for rent payable hereunder), exemplary, punitive, special, incidental, indirect or consequential damages, each of which is hereby excluded by agreement [of] the parties regardless of whether or not any party has been advised of the possibility of such damages.”

The master landlord signed a “consent to sublease” prior to the execution of the sublease. Shortly after the sublease was executed, the subtenant noticed a foul odor in the premises. It informed its sublandlord that it was being constructively evicted as a result of the odor and the high levels of certain gases within the premises. It then moved out of the premises. The sublandlord sued for the rent due. The subtenant responded by filing a complaint against the sublandlord and the master landlord alleging constructive eviction and fraud.

The lower court dismissed the subtenant’s complaint, holding that the subtenant’s claims were barred by the sublease’s exculpatory clause. Thus, the Court ruled that the subtenant failed to state claims upon which relief could be granted. It also held the fraud claims against both defendants failed because they had not been plead with sufficient specificity.

The subtenant appealed, but the Appellate Division affirmed, holding that exculpatory clauses in commercial leases are enforceable if they do not involve an inequality of bargaining power and do not affect the public interest. Here, the clause at issue: (a) was part of contract between private parties and did not affect the public interest; (b) did not relieve the sublandlord of any duty it was legally required to perform; and (c) both parties had substantially equal bargaining power. Further, although it noted that the subtenant contended that it was a third-party beneficiary under the master lease, it held that a subtenant generally does not enjoy greater rights under a lease than the tenant. The master lease declared the tenant was familiar with the conditions of the premises and accepted the premises as they existed on the date it took possession. The master lease also stated that the master landlord made no representations or warranties of any kind or nature regarding the premises or the property and that the tenant released the master landlord from any claims regarding the condition of the property. Further, the master lease precluded the tenant from bringing damage claims against persons or property resulting from the owner’s failure to perform its obligations under the lease. Since the tenant could not have brought a damage claim against the master landlord, the Court agreed with the lower court that the subtenant was also barred from asserting these claims. Furthermore, the Court ruled that, assuming the master landlord had an obligation to remedy deficiencies in the subleased premises and failed to do so, the master lease provided that the subtenant’s remedy would be limited to recovering the reasonable cost of performing the obligation. In this case, there was no allegation that the subtenant ever incurred such costs.

The Court also rejected the subtenant’s contention that the lower court erred by dismissing its fraud claims. Under the sublease, except for the representations expressly set forth in the sublease, the subtenant had to rely solely on its own inspection and not on any express or implied representations of the sublandlord. As to fraud claims against the master landlord, it noted that the master lease provided that the tenant was familiar with the conditions of the premises and that the landlord had not made any warranties or representations as to the suitability of the premises for the tenant’s business operations. Finally, the sublease consent agreement stated that it “shall not be deemed to modify, waive or affect any of the terms, covenants or conditions of the master lease.” Thus, the Court concluded that the subtenant’s claims that the sub-landlord or master landlord knew about, and failed to disclose, the foul odors and problems with the air quality were barred by the master lease, by the landlord’s consent to the sublease, and by the sublease itself, each of which negated any claims by the subtenant that it could have reasonably relied upon any representation by either the sublandlord or the master landlord. Moreover, according to the Court, because the subtenant immediately vacated the premises, it gave the master landlord no time to cure the problem, let alone make any representation regarding it.

Even though the subtenant found itself without the ability to assert any monetary claims, neither the lower court nor the Appellate Division barred those same claims from being used as part of the subtenant’s constructive eviction defense to the claim for breach of the sublease suit by its sublandlord.

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