Texas law recognizes an “implied warranty of suitability for intended commercial purposes,” as stated in the Supreme Court case of Davidow v. Inwood North Professional Group-Phase I. For commercial leasing, this warranty is the closest equivalent of the implied warranty of habitability enjoyed by residential tenants. Essentially, the warranty of suitability ensures that, at the inception of the lease, there are no latent defects in the facilities that are vital to the use of the premises for their intended commercial purpose. Furthermore, it ensures that such essential facilities will remain in a suitable condition. Texas courts will evaluate a number of factors to determine, on a case-by-case basis, if any defect violates the warranty of suitability.
A 2007 Texas Supreme Court case, Gym-N-I Playgrounds, Inc. v. Snider, recently evaluated whether a tenant can waive its rights under the implied warranty of suitability for intended commercial purposes by signing a lease containing an “as-is” provision. In Gym-N-I, a landlord and tenant entered into a lease with an “as-is” provision which expressly stated that landlord made no warranties, express or implied, including warranties of suitability. Following a fire that caused significant financial damage to tenant, tenant sued based upon landlord’s failure to install a sprinkler system as required by city code. Landlord relied upon the “as-is” provision for its defense.
The Court, in its decision, applied two separate established principles of Texas law which had not previously been applied to such a situation. First, the Court cited a prior decision which established that provisions in a lease will control over the implied warranty of suitability when a tenant agreed to repair certain defects. Also, the Court relied upon the proposition that absent fraud, an “as is” provision can waive claims based upon the condition of the property. Taken together, the Court ruled that the implied warranty of suitability is waived when the lease expressly disclaims that warranty. The Court differentiated the implied warranty of suitability from the implied warranty of habitability (which cannot be waived) by emphasizing that parties to a commercial lease are generally sophisticated and negotiate on more equal footing in arms-length transactions, whereas residential leases generally involve unsophisticated parties in need of greater protection.
When this law is applied to the facts of Gym-N-I, the “as-is” provision in the lease precluded a claim by tenant for damages resulting from landlord’s failure to install a sprinkler system.
Takeaways
Often parties to a lease will be inclined to overlook “as-is” language as standard boilerplate terms and focus on the more dynamic provisions of the lease, such as use provisions. Gym-N-I illustrates how an “as-is” provision can cost or save a party to a commercial lease thousands of dollars.
As standard practice, landlords should be sure that their leases contain detailed “as-is” provisions which expressly disclaim all warranties, express or implied. This should be an exhaustive list with each type of applicable warranty listed plainly in the provision.
Conversely, tenants should be aware of these provisions in their leases. If landlord’s lease form contains and “as-is” provision, and landlord is unwilling to remove such provision from the lease, tenant must be sure to conduct a detailed inspection of the premises. Hiring a licensed inspector is a wise investment to ensure that the premises meets current code requirements, as well as the requirements of tenant’s business.
Finally, it is important to note from Gym-N-I that “as-is” provisions appear to only protect landlords for the condition of the premises as of a specific point in time (generally the lease commencement date or effective date). The Court does not appear to protect a landlord from it’s obligations to maintain and repair the premises. Therefore, both parties should keep records of the premises’ condition as of the determinative date.
