Opinion
No. 75-086
Decided July 22, 1975. Opinion modified and as modified petition for rehearing denied August 19, 1975. Certiorari denied November 3, 1975.
Action by lessor against lessee to recover for losses sustained while building damaged by fire was being restored. Fire had allegedly been caused by negligence of lessee's employees. From judgment for defendants, plaintiffs appealed.
Affirmed
1. LANDLORD AND TENANT — Obligation — Carry Fire Insurance — Assumed by Landlord — Tenant Not Liable — Fire Damage — Tenant's Use of Building — Increased Insurance Rates. Where the intent of the parties, as evidenced by the lease, establishes that the landlord assumed the obligation to carry fire insurance, the tenant does not become liable therefor when his negligence causes a fire merely because the landlord failed to obtain adequate insurance to cover the loss, and that rule is applicable to a situation in which tenant's use of the building caused the fire insurance rates to increase, that is, in such a situation, the landlord does not become entitled to recover those damages resulting from a fire which are not covered by insurance.
2. Landlord Not Required — Purchase — Business Interruption Insurance — Lease Terms — Tenant — Not Liable Therefor. Although by the terms of the lease, the landlord was not required to purchase business interruption and related expense coverage for building in which fire occurred, the fact that the landlord was not required to purchase such coverage does not render the lessee liable therefor.
Appeal from the District Court of the City and County of Denver, Honorable Edward J. Byrne, Judge.
Gould, Moch Bernick, Robert B. Moch, for plaintiffs-appellants.
Tilly Graves, Charles Q. Socha, for defendants-appellees.
Plaintiffs' warehouse building was seriously damaged in a fire allegedly caused by the negligence of their tenants, the defendants. Plaintiffs sued for recovery of rentals lost while the building was being restored, and for a real estate commission incurred in connection with securing a new tenant. Following a trial to the court, judgment was entered for defendants. Plaintiffs appeal. We affirm.
The material facts are not disputed. Plaintiffs, three interrelated, family-owned corporations, were joint owners of a building containing offices, a showroom, and a warehouse. On April 2, 1963, plaintiffs leased the building to Waste-King Universal-Denver, Inc., for a term of approximately five years ending on July 31, 1968. Waste-King used the building to store and display kitchen hardware items.
On December 15, 1966, a lease and sublease on the building were executed simultaneously. By the terms of the sublease, Clark Products, Inc., defendants' predecessor, subleased the building from Waste-King through July 31, 1968, and leased directly from plaintiffs for a term from July 31, 1968, until January 31, 1972.
After the documents were executed, Clark Products and its successors underwent several corporate reorganizations. At the time of the events material to this appeal, defendant Diamond Shamrock Corporation was the lessee of the warehouse; the other named defendants were affiliated with Diamond Shamrock. All these entities will hereafter be referred to as lessee.
During the negotiations for the lease and sublease a real estate agent acted on behalf of plaintiffs. The managing officer of the plaintiff corporations also participated. The documents, including a printed form lease, were prepared by the realtor.
Insofar as material here, by the terms of the lease, lessee agreed:
"[T]o neither permit nor suffer said premises . . . to be used for any purpose which would render the insurance thereon void or the insurance risk more hazardous . . . .
"[To] furnish its own liability and contents insurance and Lessor shall not be liable for matters insurable thereunder . . . .
"[T]o occupy the . . . [premises] as office, showroom, and warehouse." (emphasis supplied)
The lease contained a standard form "redelivery" clause which stated:
"At the expiration of this lease to surrender and deliver up said premises in as good order and condition as when the same were entered upon, loss by fire, inevitable accident or ordinary wear excepted . . . . " (emphasis supplied)
The lease also contained the following "cancellation" provision:
"[I]n case said premises shall become untenantable on account of damage by fire, flood or act of God, this lease may be thereupon terminated by the said lessee or Lessor."
The lease provided that if lessee breached its commitments to plaintiffs under the lease, plaintiffs could terminate the lease.
During the period of their occupancy of the building, lessee was engaged in the business of storing polyurethane foam, fabric and vinyl, and upholstery supplies, and fabrication of the foam. Polyurethane foam is highly flammable.
At the time that the lease agreements were signed and subsequently, plaintiffs' managing officer "assumed" that the building was used to warehouse nonflammable machinery. Sometime in August 1968 plaintiffs were informed by their insurance agent that the policy rate on the warehouse would increase from approximately $0.22 to $1.25 per $100 coverage. Thereupon, plaintiffs' managing officer, together with the insurance agency and an official of the insurance company, visited the building. As a result, plaintiffs learned that the building was used to store flammable materials. Although the managing officer informed lessee's foreman that something would have to be done about the situation, plaintiffs took no steps to terminate the tenancy. Approximately three weeks after this visit, on September 17, 1968, a substantial portion of the building was destroyed by fire.
On September 20, 1968, lessee terminated its lease with plaintiffs pursuant to the above-quoted cancellation provision, and paid no rent thereafter. Plaintiffs subsequently restored the damaged building with insurance proceeds. However, plaintiffs carried no insurance to cover loss of rentals or other business expenses incurred as a result of fire. Fourteen months were required to restore and re-rent the building.
Plaintiffs asserted two claims for relief: That lessee's use of the building, which increased the insurance risk thereon, constituted a breach of the lease and that but for this breach the fire would not have occurred, and that lessee's negligence and "gross carelessness" in handling flammable material were the cause of the fire.
The trial court found, inter alia, that the fire was caused by the "simple negligence" of lessee's employees.
Relative to the provisions of the lease governing use of the building, the trial court in effect determined that lessee had not breached that provision which limited use of the building to "office, showroom, and warehouse." However, the trial court also determined that the intent of the parties was to enable plaintiffs to terminate the lease if lessee's activities raised the insurance rate because the rental would not be gauged to the higher insurance premium. The trial court found that while plaintiffs had the right to terminate the tenancy when the insurance rates were increased, they had not done so and no liability attached to lessee in this connection.
On the basis of these findings and the decision of this court in Employers Casualty Co. v. Wainwright, 28 Colo. App. 292, 473 P.2d 181, the trial court concluded that negligence on the part of lessee did not preclude it from terminating the tenancy because of the fire under the cancellation clause.
Plaintiffs contend, and we agree, that the only issue before us on appeal is whether Employers Casualty Co., supra, controls the disposition of this case. Plaintiffs assert that it does not. We agree with the trial court.
In Employers Casualty, the landlord's insurer as subrogee sought recovery from amounts expended to repair a building damaged by a fire which was caused by the negligence of the tenant. The lease contained the same form of redelivery clause involved in this case. Relying upon Rock Springs Realty, Inc., v. Waid, 392 S.W.2d 270 (Mo.), 15 A.L.R.3d 774, (a case in which the landlord sued to recover for both damage to the building and lost rent), this court interpreted the redelivery clause as exempting the tenant from any liability for fires resulting from his negligence since the intent of the parties, as evidenced by the lease, was for the landlord to carry fire insurance for the benefit of both parties. The holding in Rock Springs is predicated on the use of the word "fire" in the redelivery clause, the reasoning being that if the parties intended to exclude fires caused by negligence of the tenant, specific language to that effect would have been included.
Plaintiffs seek to distinguish both Employers Casualty and Rock Springs on the basis that in their view lessee breached the lease by its use of the building. Plaintiffs therefore conclude that lessee may not invoke the benefits of the cancellation clause because of its breach and also because its negligence caused the fire which made the building untenantable. We find no merit in this contention.
[1] Assuming, arguendo, that a violation of the insurance provision occurred when the insurance rates increased, the lease provided plaintiffs with their remedy, namely, to terminate the lease. However, they failed to invoke that remedy. From the fact that the use of the building caused the insurance rates to increase, it does not follow that plaintiffs then become entitled to recover those damages resulting from a fire which are not covered by insurance. Rather, the rule announced in Employers Casualty as adopted from Rock Springs still applies, namely: Where, as here, the intent of the parties, as evidenced by the lease, establishes that the landlord assumed the obligation to carry fire insurance, the tenant does not become liable therefor when his negligence caused the fire merely because the landlord failed to obtain adequate insurance to cover the loss. Moreover, since the term "fire" is used without limitation in both the redelivery and the cancellation clauses of the lease before us, the same reasoning applies in interpreting both provisions, and lessee was entitled to cancel absent specific provisions to the contrary.
[2] Plaintiffs next contend that business interruption and related expense coverage was not purchased by them and that they had no obligation to purchase such under the lease. We agree that they were not required to purchase such coverage, but we do not agree that plaintiffs' failure to do so renders lessee liable therefor under the rule in Rock Springs.
We have examined plaintiffs' other allegations of error and find them to be without merit.
Judgment affirmed.
CHIEF JUDGE SILVERSTEIN and JUDGE KELLY concur.