Contracts Are King, Or Are They? How the Case of Abercrombie & Fitch v. Penn Square Mall Effects The Commercial Leasing Landscape

The commercial real estate leasing industry is notable in the extent to which business terms and legal obligations are memorialized in great detail in written contracts.  The exclusive use of written agreements is driven by the subject of the contracts, i.e., real estate, complexity of designing an agreement that may remain in effect for many years, and the potentially conflicting interests and incentives of the landlord and tenant. Perhaps few industries are as awash in standardized contract forms and boilerplate terms like the real estate industry.

It is understandable and appropriate for commercial landlords and tenants to focus their attention on the important task of memorializing their agreements about known issues such as the allocation of risk of potential unknown factors such as damages for water leaks, and other casualty and force majeure events.  In the event of a dispute, the contract is meant to be the determinant of who bears the risk of loss.  However, the parties should not lose sight of the fact that their legal rights and remedies are not based solely on the agreements they may have signed.

In addition to agreement-based rights and obligations, Oklahoma “tort” law imposes all sorts of implied rights and obligations independent of what parties may have formally agreed to.  The foremost “tort” obligation is to use reasonable care so as to avoid damage to others.  The failure to use reasonable care is negligence.

Because of the dominance of formal contracts in the commercial real estate leasing industry, courts in other jurisdictions historically were reluctant to recognize the applicability of tort remedies on commercial contracts. The philosophy was that parties were expected to define their obligations in the written agreements that would be the sole determinants of their rights.

One party could not sue another outside of contract for negligence if the harm was merely economic and the duty arose from the contractual relationship. The recent case of Abercrombie & Fitch v. Penn Square Mall, 2018 OK CIV APP 56, 425 P.3d 757 (Okla. Ct App. 2018), however, teaches commercial landlords and tenants that Oklahoma courts will permit the pursuit of both contractual and negligence theories for economic losses. This case emphasizes the serious risk of claims and damages outside the scope of the parties’ carefully negotiated contracts.

Abercrombie & Fitch v. Penn Square Mall, arose from a water leak in a roof drain line running above the ceiling of the leased premises in Penn Square shopping mall. Abercrombie & Fitch, the tenant, filed suit against Penn Square Mall LP alleging Penn Square “had a contractual duty to maintain the mall’s plumbing lines in good order, condition, and repair,” and that Penn Square breached this duty. Abercrombie asserted theories of breach of contract and negligence against Penn Square, and asserted that as a result of the water leak it “incurred substantial damages in cleanup, repair, lost merchandise, lost profits, and interruption to its business,” and sought damages in excess of $300,000. Despite the existence of a commercial lease with a limitation of liability clause, the case went to trial for damages under both contract and negligence theories.  At trial, the tenant was awarded nothing at all for its breach of contract claims, but the jury awarded $243,000 in lost profits, cleanup, repair, lost merchandise, and interruption to its business on the negligence claim. 

The landlord appealed, arguing that the tenant should not have been able to pursue damages for both breach of contract and negligence, and that the lease contract had a clause waiving such consequential damages.  However, the appeals court ruled that the language of the consequential damages limitation in the contract could reasonably be interpreted to relate only to the tenant’s contractual claims and not its negligence claims.  Therefore, the tenant’s judgment for lost profits, cleanup, repair, lost merchandise, and interruption to its business on the negligence claim was upheld.

Abercrombie & Fitch v. Penn Square Mall is a good reminder that commercial landlords and tenants must consider the extra-contractual risks and remedies under Oklahoma tort law.  As the court in Abercrombie found, a waiver of consequential damages provision, depending upon its wording, may only protect against contractual claims, not negligence claims.  Notice and other procedures may be interpreted to relate to contractual claims unless the contract explicitly includes the full universe of claims—both contractual and non-contractual.

The issue of extra-contractual claims can also arise in the context of determining the scope of an arbitration clause.  If an arbitration clause is drafted narrowly to encompass claims arising under the contract, it may not be broad enough to include negligence claims related to the leased premises and the parties’ relationship as a whole.  Absent unusual situations, care should be taken to ensure that the arbitration scope broadly covers all claims that might arise, not just contractual claims.

A good contract will recognize and address the possibility that parties may resort to tort remedies.  That way, the contract will retain its primacy in governing the rights and obligations of commercial real estate landlords and tenants. To anticipate this problem, the drafter should include language in the contract to this effect: “The parties agree that, regardless of the failure of the sole and exclusive remedy, landlord will not be liable for any consequential damages of whatsoever kind or nature.”

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