United States: Premises Liability for Owners Expanded; Triple Net Lessors Beware

Section 78 Multiple Dwelling Law provides, in relevant part, that each "owner" is responsible to maintain in good repair every multiple dwelling and that the tenant is also liable if a violation of § 78 is caused by the tenant's own willful act, assistance or negligence. Owners attempting to escape liability under § 78 often times net lease the property. But, in a case of first impression, a New York state appellate panel (First Department) has recently ruled that an owner of property who net leases its propertyto a tenant, without reserving to itself any right of re-entry or inspection and repair, may nevertheless be held responsible in tort for defects at the property under New York Multiple Dwelling Law § 78. For purposes of the Multiple Dwelling Law, a multiple dwelling is defined as a dwelling which is rented or leased and is occupied as the residence or home of three or more families living independently of each other.

In Bonifacio v. 910-930 Southern Boulevard LLC, Mr. Bonifacio suffered injuries when the elevator in which he was riding at the property suddenly dropped four floors. The owner of the property, 910-930 Southern Boulevard LLC (which had acquired title pursuant to a judgment of foreclosure), unsuccessfully argued that it was an "out-of-possession owner with no control over the premises" as a result of a "triple net lease" it had entered into by which the tenant had agreed to assume sole responsibility of the premises as if it were the owner. The Bonifacio court held that the absence of a right of re-entry does not conclusively establish that the owner has completely parted with possession and control of the building (and thus has ceased to be an "owner" for the purposes of § 78), but, rather, that retention of a right of re-entry is only one way an owner may maintain a sufficient degree of involvement and, as such, be held liable under § 78.

In the context of a multiple dwelling, the First Department had previously ruled that where an owner net leases an entire building but reserves for itself a right of re-entry, such right of re-entry subjected the owner to liability for defective conditions in the building. In Guzman v. Haven Plaza Housing Dev. Fund Co., the plaintiff fell and sustained injuries while descending a flight of stairs on her way to the bathroom in the grocery store operated by the defendant, Daitch-Shopwell, where she worked as a meat packer. Daitch occupied the premises under a long-term lease from the owner, Village East. Plaintiff sued the owner-lessor, Village East, and recovered a verdict for her injuries. Under its lease, Village East, as owner-lessor, could enter the premises "at all times" to inspect. In addition, it had the right to make repairs "if the tenant fail[ed] to make" them and to change the "arrangement and/or location" of the stairs. Although there is no evidence that Village East had actual notice of the claimed dangerous condition, its right to re-enter the premises was sufficient to charge it with constructive notice of the defect. The Guzman court held that Village East's failure to act to remedy the defect, as it could have done under the lease, subjected it to liability.

The courts are not allowing form to prevail over substance and thus will require an examination of the exact nature of the relationship between the owner and the lessee in deciding whether an owner has in fact given up sufficient possession and control, even if there is a triple net lease in effect. In refusing to grant the owner-lessor's motion for summary judgment, the court called into question unexplained connections among the former owner, thecurrent owner and the agent/lessee.

Nonetheless, under § 78 there are still opportunities for owners to avoid liability where such owners' legal arrangements and actual interaction with the party in possession and control of the property establish that the owner has no right or responsibility regarding the operations of the property itself.

Situations where courts have upheld the owner's escape from § 78 are not as helpful as traditional owners may want but include situations where the Dormitory Authority of the State of New York was found to be exempt from the requirements of § 78. The Dormitory Authority had provided financing to Columbia University for the construction of dormitory facilities under an agreement whereby the Dormitory Authority would hold title to the property until such time as Columbia repaid its loan. There, the court held that the Dormitory Authority's position was in the nature of a mortgagee despite the fact that it was, in form, the fee owner and, as such, it had no obligation to maintain the property.

The Bonifacio court's decision indicates how difficult it is for an owner/lessor to escape statutory liability. A "true" triple net lease may accomplish such a goal, but owners who start carving away at the "true" triple net lease and owners who, through other means, have access to and/or directly or indirectly control aspects of running the property, should beware.

Copyright © 2002 Gibson, Dunn & Crutcher LLP