In September 1, 1998, Lessor Chimney Sweep leased to Lessee George and Marie Burnett a 470 square foot commercial space (the premises) in a hotel in Sovang for use as gift shop and hotel convenience shop and hotel convenience shop. Lessee immediately observed water stains on the back wall and ceiling of the premises and complained to Lessor that they “observed the existence of excessive moisture and the growth of mildew and mold” on the premises. Lessor refused to repair the condition and Lessee sued Lessor claiming they inhaled the toxic airborne spores and fumes emitted from the mold and sustained severe physical injury and discomfort and severe emotional and mental distress and that business inventory and belongings became contaminated by toxic mold and airborne mold spores, requiring immediate and extensive cleaning and/or disposal. Lessee further claimed that they were unable to conduct their business at the premises resulting in substantial economic loss.

The lease contained what is commonly known as and exculpatory clause. It provided that Lessor “was not liable for any damage or injury caused by or resulting from fire, steam, electricity, gas, water or rain, or from the breakage, leakage, obstruction or other defects of pipes, fire sprinklers, wires, appliances, plumbing, air conditioning or lighting fixtures, or from any other cause. Notwithstanding Lessor’s negligence or breach of this Lease, Lessor shall under no circumstances be liable for injury to Lessee’s business or for any loss of income or profit”.

The trial court granted a motion for judgment on the pleadings in favor of the Lessor and awarded attorney fees of almost $140,000 to Lessor and another defendant. Lessee appealed.

The California Second Court of Appeals reversed ruling: (1) The law does not look with favor upon attempts to avoid liability or secure exemption for one’s own negligence and such provisions are strictly construed against the person relying upon them; (2) “For an agreement to be construed as precluding liability for ‘active’ or ‘affirmative’ negligence, there must be express and unequivocal language in the agreement which precludes such liability; and (3) the provisions in the exculpatory provisions of this lease do not specifically mention active negligence so Lessor is liable for their active negligence. The appellate court decided that it cannot, without more explicit and specific words in this clause, conclude that the minds of the parties met and agreed to exempt Lessor from the consequences of their own wrongful acts of the kind and nature involved in this case. The court reversed both the decision of the trial court granting judgment on the pleadings and the award of attorney fees and granted Lessor their costs on appeal.

This case makes it clear that the standard poorly worded exculpatory provisions in a typical commercial lease will not protect the Landlord from claims asserted by the Tenant if the damages are a result of the Landlord’s “active” negligence. Commercial property owners should review and revise their standard leases to specifically include a waiver of any damages for active negligence. Even with this change, the courts are likely to try very hard to find a reason to allow a Tenant to maintain a claim when the Landlord is actively negligent as here where the Landlord ignored the problem and refused to correct it for a long period of time. For insurers, this case could create liability for mold claims that are often excluded in policies when asserted by the insured. Because this mold claim was not asserted as a third party liability claim, and the court ruled it was based specifically on the “active negligence and not willful misconduct of the Lessor, it will likely be a covered claim in a standard CGL policy. Burnett v. Chimney Sweep (2004), 123, Cal. App. 4th, 1057.