This article was written by Robert S. Tanenbaum, an associate with Womble Carlyle Sandridge & Rice, LLP in its Washington, D.C. office. Mr. Tanenbaum counsels commercial landlords and tenants on litigation avoidance and litigates business and real estate disputes in Maryland, Washington, D.C., and throughout the Eastern seaboard.
Many commercial leases contain an expansive exculpatory clause protecting the landlord from all claims, including for its own acts or omissions. Of course, such a clause is popular with sophisticated landlords. In a business atmosphere where consistent streams of income are sought, tools that minimize — or even eliminate — risk to the balance sheet are prized. But are exculpatory clauses enforceable in Maryland? It depends.
In this brief discussion, I identify what kind of exculpatory clause is enforceable in what kind of circumstance. Employed correctly, a broad exculpatory clause may prove critical in protecting commercial landlords from a variety of claims, including for its own misconduct.
The Maryland Court of Appeals first considered the enforceability of an exculpation agreement in Eastern Avenue Corp. v. Hughes, 228 Md. 477, 180 A.2d 486 (1962). In Hughes, a tenant sued her landlord for injuries she sustained after tripping in the parking lot adjacent to her leased premises. Bertha Hughes had previously executed a lease agreement containing an exculpatory clause that stated the landlord would not be held liable for injuries arising from “failure to keep the demised premises in repair.” Id. at 480, 180 A.2d at 488. After suit was filed, the jury awarded the tenant damages and the trial court denied the landlord’s motion notwithstanding the verdict. The Court of Appeals reversed, noting “[a]lmost all of the courts that have passed on the question have held exculpatory clauses valid.” Id. at 479, 180 A.2d at 488. The Court was thus “constrained to follow the great weight of authority” upholding freedom to contract. Id.
Two years later, in 1964, the Maryland General Assembly declared that such exculpatory clauses in leases are void as against public policy. The statute (Md. Code, Real Prop. § 8-105) — still good law today — reads in its entirety as follows:
If the effect of any provision of a lease is to indemnify the landlord, hold the landlord harmless, or preclude or exonerate the landlord from any liability to the tenant, or to any other person, for any injury, loss, damage, or liability arising from any omission, fault, negligence, or other misconduct of the landlord on or about the leased premises or any elevators, stairways, hallways, or other appurtenances used in connection with them, and not within the exclusive control of the tenant, the provision is considered to be against public policy and void. An insurer may not claim a right of subrogation by reason of the invalidity of the provision.
In plain terms, Section 8-105 prohibits any provision in a lease that attempts to indemnify the landlord or hold it harmless for any misconduct by landlord in areas of the property not within the exclusive control of the tenant. The statute proscribes; it does not, on its face, enable. It establishes what is unenforceable. But the statute’s proscription to areas of the leased premises “not within the exclusive control of the tenant” begs the question as to what is enforceable: Will a Maryland court enforce a clause indemnifying landlord for landlord’s misconduct on the leased premises that is within the exclusive control of the tenant? Yes.
This could arise where, for example, a commercial tenant is leasing an entire building to operate a standalone restaurant and an electrical fire damages the premises. Tenant sues the landlord for ordinary negligence arising from landlord’s failure to properly install the wiring before the tenant moved in. If the lease contains an exculpatory clause in compliance with Section 8-105, landlord may be absolved of any liability, even for its own negligence, because the tenant possesses exclusive control of the building.
Note the careful qualification that the tenant, in the above example, brought a claim only for ordinary negligence. That is because, if the tenant had a claim for gross negligence, recklessness, or intentional misconduct, an exculpatory clause that otherwise complies with Section 8-105 — i.e., damage arising from the premises under the tenant’s exclusive control — is voided by Maryland common law. Outside Section 8–105, Maryland law operates to void exculpatory clauses where, among other things, gross or extreme misconduct is implicated. See BJ’s Wholesale Club, Inc. v. Rosen, 435 Md. 714, 725, 80 A.3d 345, 351 (2013).
In a real world example, a Maryland federal court enforced an exculpatory clause for landlord’s own alleged misconduct. In White v. Walker-Turner Division, the tenant sued the landlord for damages arising from the tenant’s use of woodworking equipment on the leased property, a farm. 841 F. Supp. 704 (D. Md. 1993). The tenant alleged the landlord knew about the dangerous condition of the equipment from an accident years before the lease was entered into. The court granted summary judgment on two grounds, one of which relied upon an exculpatory clause in the lease. The clause provided in relevant part: “Landlord shall not be liable for . . . accidental injury to person or property in or about the premises resulting from . . . any [ ] cause whatever and Tenant shall make no claim against Landlord for any such loss, damage or injury.” Id. at 705. The court reasoned: “Although Section 8-105 generally invalidates exculpatory clauses designed to exonerate a landlord for injuries which arise as a result of his or her own negligence, that section does not apply where a tenant is in exclusive possession of the premises. Here, the record establishes that plaintiff was in exclusive possession of the farm in question.” Id. at n.1
The court’s ruling was interesting less for what it said and more for what it did not say. The exculpatory clause was arguably overbroad, covering all misconduct by landlord without regard for the tenant’s exclusive control or the severity of the landlord’s misconduct. However, the court concluded that, absent evidence that the landlord exercised some control of the farm and the equipment, the exculpatory clause was enforceable. Thus, courts will enforce an exculpatory clause in a lease so long as it may be construed to cover cause or injury within the tenant’s exclusive control. That is relatively clear.
The second, less clear question, however, is: What does “within the exclusive control” of the tenant mean? White by its own admission did not substantively discuss “exclusive control,” but several other cases flesh the term out. Assessing exclusive control is made in light of all the circumstances, including the lease provisions and the practices and intent of the parties. Shell Oil Co. v. Ryckman, 43 Md. App. 1 (1979).
Shell Oil illustrates a broad reading of “exclusive control of the tenant.” Id. In Shell Oil, the lease from an oil company to an independent operator of a free-standing service station contained an indemnification clause that was broad enough to include indemnification for claims resulting from the landlord’s negligence. The lease also contained a reservation of rights for the landlord to enter the premises at any time to inspect or repair. The tenant’s son was injured by a piece of glass falling from an overhead door in the service station building. The Court of Special Appeals found that landlord’s right to enter to inspect or repair was not tantamount to lessening the tenant’s exclusive control, particularly in light of other provisions in the lease granting the tenant control over the service station as lessee. The court reasoned that the landlord’s rights to enter — very common in commercial leases — “are standard protective measures against waste, not indicative of an intent to subvert the lessee’s exclusivity of control of the premises.” 43 Md. App. at 7. “If that is not so, there is no purpose in the exclusivity exception in the statute. No lease would ever be construed as exclusive.” Id.
The Court of Appeals went the other way in Prince Philip Partnership v. Cutlip, 321 Md. 296, 303, 582 A.2d 992, 995 (1990). There, a wheelchair-bound patient used a restroom in a doctor’s office. The restroom was not handicap-accessible and the patient could only situate herself partially in the doorway of the restroom. The patient subsequently fell and suffered injuries. She brought suit against the building’s landlord for negligence arising from the landlord’s failure to install handicap-accessible restrooms in the building. The landlord impleaded the tenant, the doctor, relying on an exculpatory clause in the lease obligating the doctor to indemnify the landlord for all claims brought by any “invitee of Tenant.” 321 Md. at 300, 582 A.2d at 993.
The Court found the exculpatory clause void under Section 8-105. The court reasoned that, though the restroom where the injury took place was exclusively within the tenant’s control, the patient’s claim arose from the landlord’s failure to install handicap-accessible restrooms anywhere in the building, as it was required to under local law. The Court rationalized: “The negligence of the landlord was ‘on or about . . . appurtenances used in connection with’ the leased premises, and those appurtenances were ‘not within the exclusive control of’ the doctor.” Id. at 303 (quoting Md. Code, Real Prop. § 8-105). Thus, the Court held the exculpatory clause invalid under Section 8-105.
White, Shell Oil and Cutlip are instructive. There is a clear area of the law that finds fully enforceable exculpatory clauses with the following criteria: (1) protecting the landlord for its own negligent or accidental misconduct but not any more serious misconduct and (2) involving damages arising from a part of the leased premises under the tenant’s exclusive actual control.
The following sample terms depict the contrast between a likely enforceable exculpatory clause and a likely unenforceable exculpatory clause in Maryland:
Bad: “Tenant hereby waives any and all claims of any kind against Landlord arising in any way from the lease or Landlord’s acts or omissions. Tenant further agrees Landlord shall not be liable for any damages to Tenant for failure to repair or for any other act of nonfeasance.”
Good: “Except due to the gross negligence, recklessness, or willful misconduct of Landlord, Tenant waives any claim, right, or cause of action it has or may have under any statute, common law, or theory against Landlord arising from acts or omissions on or about the part of the leased property under Tenant’s exclusive control.”
The law is less clear where there is some question as to the exclusive control of the tenant. But the following considerations or circumstances reduce the risk to the landlord: (1) the tenant leases out an entire property with no “common” areas; (2) the lease states expressly that the landlord is granting the tenant “exclusive control” of the space or particular instrumentalities leased to the tenant; (3) the landlord retains rights to enter the premises but solely to prevent waste, detracting in no way from the tenant’s lawful exclusive possession; and (4) landlord’s complete abidance by local laws concerning the construction or maintenance of the property, even if such abidance appears unrelated to the risks protected against in an exculpatory clause.
The last several decades have seen a significant reduction in Maryland of the once-broad right of landlords and tenants to freely enter into contract terms. Public policy has created standards largely to protect tenants. However, the Maryland legislature’s scaling back of exculpatory clauses does not mean landlords are without recourse to protect themselves from the many risks of liability stemming from property leasing. With the above discussion and suggestions in mind, landlords may gain more clarity in what risk they are limiting and what risk they are inviting. And, ultimately, move the unknown on the balance sheet into the predictable.
Please note that different considerations apply to the enforceability of clauses exculpating commercial landlords in other states, including Virginia and D.C. In addition, Maryland law does not recognize exceptions to exculpation for ordinary rather than gross negligence or “exclusive control” in residential leases and in the construction context. Therefore, it is important that anyone seeking to apply the concepts discussed in this article seek further guidance regarding the use of exculpatory clauses in Virginia and D.C., as well as in residential leases and construction documents in Maryland.