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What are you implying? Implied warranties in construction contracts


What are you implying? Implied warranties in construction contracts.

By Jasmine Singh, Associate

Property law provides numerous warranties for residential leases—warranty of habitability, warranty to construct in a workmanlike manner, etc. But the options for implied warranties in the commercial context are far more limited. For example, there is no warranty of habitability or workmanlike construction. The law was developed to give commercial tenants fewer protections than residential tenants because courts assumed that commercial tenants were better versed in business dealings and more sophisticated than residential tenants; therefore, commercial tenants did not need as much protection.

Unfortunately, this one size fits all approach, though acceptable for large commercial tenants, harms the small business commercial tenants who do not have the business savvy courts assume they do. Consequently, some commercial tenants get locked into some very unfavorable leases with no way out. Fortunately, Texas law has realized that not all commercial tenants are created equally, and has developed some protection for commercial tenants in the form of the implied warranty of suitability for a particular commercial purpose.

The warranty of suitability means 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 and that these essential facilities will remain in a suitable condition.”[1] Texas, one of only two jurisdictions[2] which recognizes an implied warranty of suitability in commercial leases, first applied the warranty in Davidow in 1988. Dr. Davidow leased a medical office space for five years.[3] Per the lease, the landlord was to provide air conditioning, electricity, hot water, and other services required for a functioning medical office.[4] Instead, the air conditioner did not work, the roof leaked, and hallway lights were not replaced on time leaving portions of the office unlit.[5]

Up to this point, Texas law had treated the landlord’s covenant to repair the premises and the tenant’s covenant to pay rent as independent covenants, meaning that even if the landlord failed to perform his duty, the tenant still was required to continue paying rent.[6] The Davidow court changed. It held that for commercial leases, the tenant’s duty to pay rent is dependent upon the landlord’s performance of his duties because commercial landlords have a greater ability as well as a greater incentive to inspect for and make repairs to the property.[7] Thus, if the landlord breaches the warranty of suitability, the tenant is not required to continue paying rent.

Though the warranty provides some protection to commercial tenants, it is not always applicable. First, the Davidow court noted that the warranty would apply unless parties to a lease expressly agreed that the tenant would repair certain defects.[8] However, if a tenant does not explicitly assume the obligation to repair certain defects in the lease, then the warranty remains intact.

For example, in Parts Industries, the court held that the tenant’s optional remedy to either make repairs the landlord was obligated to make or to terminate the lease was not an express agreement by the tenant to repair certain defects.[9] Second, the warranty only applies to latent, not patent, defects. Therefore, the warranty is specifically limited to defects which are not clearly apparent or certainly present but can emerge and develop.[10] For instance, where there was visible mold on HVAC filters, the court found that the landlord did not breach the warranty of suitability because the mold was a patent, not a latent, defect.[11]

Additionally, because Texas has a strong public policy favoring freedom of contract,[12] the warranty of habitability can be easily waived. For example, though it had previously held that the warranty of habitability could only be waived to the extent the defects were adequately disclosed, in Gym-N-I, the Texas Supreme Court held that a commercial tenant waived the warranty of suitability when it signed a lease with an “as is” clause and a general warranty waiver.[13] Such a waiver need not be an explicit waiver of the warranty of suitability either.[14] Thus, a commercial tenant could inadvertently waive the warranty of suitability.

So, while the warranty of suitability does provide commercial tenants some protection, that protection is not very expansive, and it can be very easily lost. Therefore, it is crucial that commercial tenants, especially those who are less experienced in such business transactions, know their rights and how those rights apply. Even more importantly, tenants should review the entirety of their commercial leases prior to signing so the tenants do not inadvertently waive their rights and remedies under the law.

[1] Davidow v Inwood North Professional Group—Phase I, 747 S.W.2d 373, 377 (Tex. 1988).
[2] New Jersey is the other jurisdiction which recognizes the implied warranty of suitability in commercial leases. Reste Realty Corp. v. Cooper, 251 A.2d 268 (N.J. 1969).
[3] Id. at 374.
[4] Id.
[5] Id.
[6] Id. at 375.
[7] Id. at 376.
[8] Davidow, 747 S.W.2d at 377.
[9] Parts Industries Corp. v. A.V.A. Services, Inc., 104 S.W.3d 671, 681 (Tex.App.—Corpus Christi-Edinburg 2003, no pet.).
[10] Univesco, Inc. v. RSP Management Services, NO. 05-99-00797-CV, 2000 WL 288336, at *2 (Tex. App.—Dallas 2000, no pet.) citing WEBSTER’S THIRD NEW INTERNATIONAL DICTIONARY 1275 (1993)
[11] Casselsco, Inc. v. Alvi, NO. 01-20-00324-CV, 2021 WL 3356849 at *7 (Tex. App.—Houston [1st Dist.] 2021, no pet. h.).
[12] Churchill Forge, Inc. v. Brown, 61 S.W.3d 368, 370 (Tex. 2001)
[13] Gym-N-I Playgrounds, Inc. v. Snider, 220 S.W.3d 905, 909 (Tex. 2007).
[14] See McGraw v. Brown Realty Co., 195 S.W.3d 271, 277 (Tex.App.—Dallas 2006, no pet.) (Court held that tenant explicitly waived his right to terminate the lease because of the condition of the premises, therefore, he contractually waived his breach of the warranty of suitability defense for nonpayment of rent).

West Mermis

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West Mermis provides practical legal solutions for our clients in the construction industry. Our attorneys have proven courtroom experience before federal and state courts, and routinely represent clients in high-stakes commercial arbitration. We provide high-quality legal advice throughout the life cycle of construction projects, prioritizing the business interests of our clients.

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