Implied Repair Covenants in Commercial Leasing

The United States traces its common-law heritage back over more than a millennia, and the statutes regulating real-estate transactions have changed substantially (to put it mildly). According to a study by Paula C. Murray that was published in the University of Richmond Law Review, “The tenant bore all the risk of the physical condition of the property — caveat lessee. The tenant could provide for landlord repairs in the lease, but could not withhold rent if the landlord failed to make those repairs. Additionally, the tenant assumed primary responsibility for the condition of the premises once he took possession of the property.”

Things have certainly changed over the past thousand years or so. In recent years, courts have placed more and more responsibility on landlords — but these decisions have more often focused on residential landlords. This has left commercial landlords with questions about what they need to do. What are tenant responsibilities and tenant obligations? What repair covenants and implied warranties bind landlords? And how can landlords and tenants keep a property in acceptable shape without running afoul of legal problems? This post seeks to answer some of these queries.

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What are Lease Covenants?

At their core, lease covenants seem simple, but it’s a deceptive simplicity, one that hides a lot of complexity. A lease covenant refers to an agreement between two or parties in the context of a (you guessed it) lease. However, that’s only the start. The law office of Luscombe Gray points out that there are two kinds of lease covenants. “Restrictive covenants seek to prevent certain conduct or uses, much in the same way as restrictive covenants attached to real property. For example, stopping the construction of additional buildings on the land. Positive covenants require certain action from the party in question, such as requiring a leaseholder to maintain and keep the property in a certain condition.”

Things get even more complex when we consider that covenants can be express (i.e., written out, so to speak, either in a contract or verbally) or implied (i.e., binding, but only by inference from various sources). Implied covenants come in various types and generally include:

  • Covenants implied by law or statute (i.e., stipulations related to previously passed legislation or regulation)
  • Covenants implied by necessary implication (i.e., conditions required by other lease language or 
  • Covenants implied by common law (i.e., based on the common-law tradition that informs our legal framework)

As you can tell, implied covenants concern landlords, particularly when it comes to required repairs, which can prove costly. But before we dive into potential covenant problems, understand that legally binding language — including implied covenants — can vary from situation to situation and state to state. The following guidelines are just that: guidelines. You should always consult with competent legal counsel before applying anything read online to your specific set of circumstances.

Warranty of Habitability and Fitness

As the common-law tradition has shifted over the years, three specific implied covenants have emerged and are commonly held. BOMI International notes that these are the:

  • Covenant of quiet enjoyment (the expectation to use the property without interference from third parties or the landlord)
  • Covenant of possession (the idea that the tenant can solely use the property so long as he or she continues to pay rent)
  • Warranty of fitness (the promise that the premises will remain in such a state that the tenant appropriately use them)

However, there’s an important element to consider regarding these covenants and warranties. Courts have traditionally confined this understanding to residential properties, not commercial real estate. Murray states, “The development of implied covenants in commercial leases has not kept pace with the development in residential leases. Courts that have eagerly embraced the notion of implied covenants in residential leases have not been very willing to do so in the commercial context.”

That seems as though it may be changing, though. Writing for LegalMatch, Ken LaMance says, “Courts worry that if implied warranties are extended to commercial leases, landlords will raise rents and tenants will pass those costs onto their customers. Despite this, other courts have found that modern business leases, particularly those for commercial office space, resemble their residential counterparts. For this reason, some courts say that an implied warranty of fitness or suitability for purpose is implied in commercial leases.”

Repairs for Normal Wear and Tear

It’s an understatement to say that commercial real estate law remains in a less-than-settled state when it comes to the doctrine of the warranty of habitability and fitness. Still, landlords and property owners can have a fair degree of certainty when considering certain sorts of situations. 

LaMance explains that, when courts have considered the habitability and fitness tests, “Examples of defects that were not sufficient to find a breach of the warranty include leaky bathrooms [and] lack of humidity control in a steam heated building. Some examples of defects that courts have found sufficient to violate the warranty of suitability include: latent physical or structural defects in demised premises; persistent leakage of water through the roof, ceiling, or walls; serious defects in the sewer or drainage; [and] inadequate or defective air conditioning, electric, or other building service.”

In short, as long as normal wear and tear doesn’t result in major, ordinary-activity-impeding damage, commercial landlords do not face legal liability if they don’t remedy them.

Repairs that Tenants are Responsible For

So which lease repair items should a tenant pay for and which should a landlord pay for? Is the “breach of warranty” mentioned above an absolute thing? Not necessarily. Just because some have advocated an expanded warranty of fitness for commercial properties doesn’t mean that it’s recognized in every case across all 50 states. Unsurprisingly, the answers to these questions depend largely on your lease. 

According to LaMance, “The implied warranty of habitability in residential leases generally cannot be waived.  However, the implied warranty of suitability may be contractually waived in commercial leases. Therefore, it is important to read your lease.  Words like ‘as is’ may be sufficient to waive the implied warranty of suitability.” If you find yourself wondering about — or quibbling over — repair items that you think your tenants should pay for, it makes sense to review your lease with a qualified attorney.

Given our long-running history in the Chicago area, we at GNP Realty understand the challenges and quirks surrounding lease repair stipulations. If you have questions, contact or call us at (312) 329-8400 to see how we can help.