Sending a strong message about the importance of every word in a commercial lease, the Seventh Circuit Court of Appeals recently found in favor of a landlord in a dispute with its tenant over responsibility for approximately $1 million in repairs to warehouse property due to the lease language allocating different responsibilities for repair to the “floor” versus the “foundation” of the warehouse.
In Aeroground, Inc., d/b/a Menzies Aviation v. Centerpoint Properties Trust, 738 F.3d 810 (2013), the court held that the tenant, Menzies Aviation, is responsible for repairing the damage to the floor of the 185,280-square-foot warehouse it rents from Centerpoint near Chicago’s O’Hare Airport. Menzies Aviation operates an air cargo–handling business that requires large industrial forklifts at the warehouse. Less than two years into the term of the lease, the warehouse’s concrete slab began cracking, scaling, and raveling along the joints. It was undisputed that the damage came from the slab’s inability to support the heavy forklifts necessary to Menzies’ air cargo business. The estimated cost to install a new, identical floor is $966,000; installing a floor that will accommodate Menzies’ heavy machinery will cost $1.23 million.
Of course, the court first looked to the lease language to determine which party is liable for damage to the concrete slab. The Illinois law applied in Aeroground is typical of most states. The goal of the court is to ascertain the parties’ intent through the plain and ordinary meaning of the contract language. Specificity in the contract is paramount. However, the lease at issue in Aeroground did not contain the necessary language to resolve this dispute. The lease did not use either the term “slab” or “concrete slab” and the lease did not define “floor” or “foundation.” Therefore, as it relates to the issue at hand, the court found the contract to be ambiguous.
In resolving the ambiguity, the court considered relevant lease language, as well as extrinsic evidence of the intent of the parties. The relevant portions of the lease state that Menzies would be responsible for repairing “all floors” while Centerpoint would be responsible for repairing the “foundation.” Several engineers testified at trial that the building’s foundation consisted of a “perimeter trench-footing set at four feet below the concrete slab and drilled concrete piers set in the ground, supporting the columns that hold up the roof.” Further, an engineer testified that the concrete slab provides no vertical support for the walls or roof. The court also considered pre-lawsuit communications in which the parties consistently referred to the problem with the “floor” and not the foundation. In addition, the court applied a general rule of contract construction that the more specific terms control over broader terms. In particular, there was a provision of the lease that required the landlord to repair unspecified damages, which the court determined was trumped by the specific obligation of the tenant to repair and maintain the floors.
Consequently, the court held that the damage was to the floor and not the foundation. Therefore, Menzies, the tenant, is responsible for the repair and not the landlord, Centerpoint.
The clear takeaway from this decision is that every word of a lease matters. The time to consider potential liabilities was at the time of drafting the contract, not when a dispute arises. And, it is important to craft an agreement that deals with the specific uses of the property. In this case, with heavy industrial equipment operating on the warehouse floor, the parties could have contemplated the need for an appropriate floor and foundation that would accommodate the specialized use that Menzies intended for the property. Instead of controlling the division of liabilities with lease language, they left it to a court to weigh expert testimony, prior communications, and other factors in order to determine responsibility.
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