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Tenant Wins Appeal After Landlord Fails to Disclose Hazardous Materials of Which the Landlord had Knowledge
By Michael J. (“Mickey”) Maher and Sabrina D. Johnson
April 24, 2024
Earlier this year in Epochal Enterprises, Inc. v. LF Encinitas Properties, LLC (2024) 99 Cal.App.5th 44 (“Epochal”), a California Court of Appeal ruled in favor of a tenant whose landlord had failed to disclose asbestos and lead paint the Landlord knew was on the premises. The moral of the story: if you’re a landlord, and there is a statute obligating you to disclose to a tenant something you know about the property (in this case, asbestos), and you fail to disclose despite having knowledge of the same, then the well drafted provisions in your lease that would normally limit your liability likely won’t protect you.
The Facts of Epochal Enterprises
In 2012, the Landlord, LF Encinitas Properties, bought property on which several dilapidated greenhouses were located. The greenhouses had been built in the 1960s, and during the purchase escrow, the Landlord was informed the greenhouses contained both asbestos and lead paint. The Landlord intended to modernize the greenhouses; however, before modernizing, the Landlord leased a greenhouse to the Tenant, Epochal Enterprises, in 2014. The Landlord’s employee who arranged the Lease knew the greenhouse might contain asbestos and lead paint, but did not believe any asbestos had become released, and therefore believed the Landlord did not need to disclose the possibility.
The Lease contained an “as is” provision, as well as a number of well-drafted provisions establishing the Tenant’s obligation to indemnify the Landlord, and limiting the Landlord’s liability and the Tenant’s recourse to the Landlord’s equity interest in the premises.
After moving in, the Tenant started renovating. Although the Landlord’s employee knew the Tenant’s renovation would expose asbestos, and although that concerned him, he never expressed his concern to the Tenant. Two years later, in March or April 2016, a storm damaged the greenhouse. The Lease provided that the Tenant was responsible for repairing the damage. Nevertheless, the Landlord’s employee arranged for the Landlord to retain an asbestos remediation company to perform the repairs. The company never tested for asbestos, but the Court noted the company treated the repairs as “an asbestos job.” The Landlord’s employee never informed the Tenant that he was concerned the storm damage may have released asbestos.
In May 2016, the Tenant defaulted on the Lease, and in December 2016, the Landlord brought an action to evict the Tenant. In April 2017, the Landlord obtained a default judgment in the eviction action. In the meantime, while the eviction action was pending, the Tenant, concerned that its repair-related debris might contain asbestos, arranged for the debris to be tested in early 2017. Unsurprisingly, the test was positive.
In June 2018, the Tenant filed its action based on the Landlord’s failure to disclose the asbestos in the premises. The jury found the Landlord liable for premises liability and negligence. The special verdict rendered by the jury found that: (i) the Landlord intentionally had failed to disclose facts the Tenant did not know and could not reasonably have discovered, but (ii) the Landlord had not intended to deceive the Tenant. The Landlord moved for the trial court to enter judgment in its favor (despite the jury verdict in favor of the Tenant), and the trial court granted the Landlord’s motion, finding that the limitation of liability clause barred Tenant’s recovery. The trial court entered judgment for the Landlord. The Tenant appealed, and won the appeal.
The Court of Appeals’ Holding
Reduced to its bare essence, the Epochal decision stands for the following propositions:
- California Health & Safety Code sections 25300, et seq. establish that asbestos is a hazardous air pollutant, and if a landlord knows or has reason to believe that there’s been a release of asbestos on a given premises, the landlord must disclose the condition to the tenant. Further, California Health & Safety Code sections 25915, et seq. obligate an owner to disclose the presence of asbestos to employees, contractors, and others providing services on the owner’s property.
- Generally, clauses limiting a landlord’s liability are effective and enforceable. However, California Civil Code section 1668 provides that any contract seeking to exempt a party from a violation of law, whether willful or negligent, is void.
- Therefore, the Court held that the limitation of liability clause was void to the extent the clause purported to release the Landlord from liability for breaching its statutory duty to disclose the asbestos of which the Landlord had knowledge. In other words, because the Landlord’s failure to disclose the asbestos breached a statutory duty, the provision limiting the Landlord’s liability did not insulate the Landlord from liability for the failure to disclose.
What This Means for Landlords
From a risk management standpoint, landlords must take care to disclose items to tenants/prospective tenants that landlords are required by statute to disclose. While perhaps not appetizing from a business perspective, disclosing best prevents unintended liabilities, which could far exceed the potential business cost of disclosing.
Further, while not expressly covered by the Court’s opinion, the same analysis likely applies to sellers in real estate transactions. Sellers should take the same care to disclose conditions of which they are aware, and which they are required by statute to disclose, because even well-drafted limitations of liability may not apply in such an instance.
For any questions about the effect of the Epochal ruling, or to discuss the potential implications of failing to disclose generally, please contact Mickey Maher at mmaher@hechtsolberg.com or Sabrina Johnson at sjohnson@hechtsolberg.com. Either can be reached at (619) 239-3444.