Habitability Claims & Commercial Property

An increasing amount of property owners were faced with habitability lawsuits in recent years. In California, juries are handing down million-dollar awards in lawsuits to plaintiffs claiming apartment complex owners failed to maintain ‘habitable’ properties.

A civil jury in Alhambra awarded a Los Angeles family $1.6 million in a bedbug case. It was the biggest payout ever in the United States for a single-family in a bedbug case. In Los Angeles, a Superior Court awarded tenants a $2 million settlement in a case that claimed there was a breach of implied warranty of habitability.

Most jurisdictions read leases to include an implied warranty of habitability. The warranty requires landlords to keep their property “habitable,” even when a lease does not state anything about repairs. The warranty additionally is coupled with rules that prohibit landlords from retaliating against tenants who complain about code violations.

Until recently, implied warranty of habitability was not extended to leases of commercial property. However, more and more courts are ruling that modern business leases, particularly those for commercial office space, resemble residential leases, and therefore an implied warranty of fitness is implied.

Examples of warranty of suitability issues in commercial leases

The law of implied warranties in commercial leases is still developing, but there are established precedents some courts have found sufficient to violate the warranty of suitability. These include:

  • Latent physical or structural defects in demised premises
  • Persistent leaking of water through the roof, ceiling, or walls
  • Major defects in the sewer or drainage
  • Defective air conditioning, electric, or other building services

Protection against habitability claims

Insurers are concerned about both the size of the awards and the defense costs for habitability claims. A habitability claim may also trigger multiple policy periods spanning years.

To avoid getting blindsided by a warranty of habitability lawsuit, commercial property owners need to do the following to protect themselves:

  • Make sure their insurance policy is up to date and provides coverage for a warranty of habitability lawsuit.
  • Add an arbitration clause to leases disallowing lawsuits to be heard by a jury.
  • Create a lease addendum which limits the attorney fees awarded if a tenant litigates.
  • Require all tenants to formally notify in writing when a repair is requested unless it’s an emergency.

Insurance brokers should be aware of the growing trend of habitability litigation and how it impacts insurance coverage. As more carriers add habitability exclusions, addressing the terms and conditions of the policy with property owners is important. Contact our McGowan Risk Specialists to learn your coverage options.