Accepting space with water issues in "as in" condition

In a case that dragged on for more than a decade between a commercial landlord and tenant, the Appellate Division, Second Dept., held last week that the landlord could not be found liable for damages sustained to the tenants' equipment based upon pre-existing water conditions in the premises, where the tenant was fully cognizant of these conditions prior to signing the lease and accepting the premises in its "as is" condition. In 34-35th Corp. v. 1-10 Indus. Assoc., LLC (2013 NY Slip Op. 00906), the tenant expressed an interest in entering into a lease for a commercial space in an industrial complex in Brooklyn (known as Bush Terminal) for the purpose of warehousing its jewelry manufacturing equipment, as well as manufacturing and processing precious metals. Prior to renting the space, the tenant inspected the premises numerous times. The tenant's engineer conducted an examination of the premises, and documented his concerns regarding water problems in the space. The engineer cautioned the tenant that prior to moving its equipment into the premises it should abate the moisture condition that would cause rust to develop on its equipment. Notwithstanding its engineer's admonitions, in May 2000 the tenant entered into a lease with the landlord, and agreed to accept the premises in "as is" condition. The landlord agreed (by way of a work letter) to perform certain repairs at the premises, including remedial work intended to address the water issues. In July 2000, prior to the landlord's completion of the repairs outlined in the work letter, the tenant moved its equipment into the premises. In Nov. 2001, a water main broke and flooded the premises. In Feb. 2002, the premises were flooded again by a sewage backup. The tenant sued the landlord for negligence and breach of contract, arguing that the landlord's failure to alleviate the excess moisture in the premises resulted in the destruction of its equipment from rust. The lower court, after a non-jury trial, acknowledged that the landlord breached the lease by failing to undertake certain of the remedial work set forth on the work letter. The court concluded that the "as is" provision contained within the lease precluded the tenant from recovering damages for breach of the lease resulting from excessive moisture conditions, particularly in light of the tenant's willingness to move its equipment into the premises notwithstanding its knowledge of the water issues and the potential damage that it could inflict upon its equipment. The appellate court affirmed this decision, reasoning that the tenant was fully aware of the excessive moisture in the premises prior to its occupancy. Under these circumstances, the court held, the tenant's damages were not proximately caused by the landlord's breach of the lease in failing to perform the remedial work, but rather by its own action in moving its equipment into the premises before the excessive moisture was alleviated. Thus, the tenant could not recover damages from the landlord on its claim for breach of the lease. This case may give a tenant cause for concern, since many commercial leases in this jurisdiction contain an "as is" clause. Thus, how can a commercial tenant avoid a predicament such as the tenant in 34-35th Corp. v. 1-10 Indus. Assoc., LLC? First, a tenant should always carefully inspect the premises prior to signing any lease, preferably with a licensed professional engineer or other type of expert. If a commercial tenant is aware of pre-existing conditions in a space that could adversely affect its tenancy, it should not sign a lease containing an "as is" provision by which it agrees to accept the premises in its current state. Instead, the tenant should attempt to renegotiate this clause with its landlord (perhaps it can create some type of carve out for any pre-existing lease conditions), or simply opt out of signing the lease and look for a new space. If the tenant does enter into a lease with such a provision, the tenant must be prepared to accept the consequences if the adverse conditions cause damage at some future point in its tenancy. Andrea Lawrence is a partner at Barton LLP, Manhattan, N.Y.