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Are Landlords Responsible Damage to Tenant Property Stored in a Rented Warehouse?

When companies have an immediate need to lease storage space, they sometimes make quick decisions and choose facilities that aren’t ideal for their needs. This can lead to a number of undesirable results, including significant damage to tenant property. In the case of A.O. Smith Corp. v. Kaufman Grain Co., the Illinois Appellate Court addresses the question of whether landlords are responsible for water damage caused to property stored in a rented warehouse.

The Facts

In the fall of 1986, the Kaufman Grain Company needed additional storage space due to an exceptionally large harvest. While searching for space, Kaufman Grain’s principle representatives visited a warehouse owned by manufacturer A.O. Smith Corporation. The manufacturer was in the process of relocating its facility and sought to either lease or sell its empty buildings. At the time when Kaufman Grain’s representatives toured the warehouse, only a small portion had been emptied. They spent approximately 30 minutes walking through the building to determine its suitability for grain storage. They also returned at a later date and drove a semi through the warehouse to ensure that a grain truck would be able to maneuver properly.

In September of that year, A.O. Smith and Kaufman Grain entered into a one-year lease agreement with an option to renew for a second year. The lease stated that the tenant (Kaufman Grain) was responsible for maintaining the warehouse and making all necessary repairs and replacements, “whether ordinary or extraordinary,” including repairing and maintaining the fire prevention system. The lease also indicated that the tenant was responsible for costs associated with operating and maintaining the property; however, it contained a stipulation that the landlord (A.O. Smith) was responsible for repairing all roof leaks up to an aggregate cost of $25,000. Furthermore, the lease contained a clause allowing Kaufman Grain to shut off the sprinkler system “with its insurer’s written permission and acknowledgment to Landlord.” The tenant was also permitted to run its own electrical service to the building in accordance with the lease. Finally, the lease stated that by taking possession, Kaufman Grain agreed the premises was in good order and repair.

Kaufman Grain took possession of the warehouse on September 29 while A.O. Smith was still removing its property from the building. Over the following six weeks, Kaufman Grain filled the warehouse with more than 1.4 million bushels of corn and over 250,000 bushels of soybeans. In October, the tenant informed A.O. Smith of pinholes in the roof, which the landlord repaired at its own expense. Then, in November, the tenant informed A.O. Smith about a leaky downspout, which it repaired. Kaufman Grain discovered two additional downspout leaks soon thereafter and, in mid-January, a representative of Kaufman Grain plugged holes in the gutters that served the downspouts. This mostly resolved the leak issue, though the tenant did report a final leak in June 1987, which the landlord then repaired.

In addition to water from these leaks, grain stored in the warehouse was exposed to water that entered the building due to an issue with the sprinkler system. The problem arose after Kaufman Grain asked A.O. Smith to disable the system, which the landlord did by shutting off the sprinklers on site at the heated valve houses. At some point thereafter, Kaufman Grain turned off several of the unheated building’s electrical circuits, including those that provided electricity to the valve houses, thereby deactivating the warming devices. Because of this, a valve froze and a pipe burst in February 1987, leaking water onto the stored grain. This happened a second time in January 1988, resulting in soybeans standing in two feet of water. At that time, A.O. Smith shut off the water supply at a remote location.

Although Kaufman Grain initially renewed its lease, the parties agreed to terminate the agreement early. The tenant stopped making rent payments after July 1988; however, Kaufman Grain did not vacate until more than six months later.

A.O. Smith filed a lawsuit seeking to recover unpaid rent and damage to the building. Kaufman Grain then filed a counterclaim for damage to its grain in addition to expenses incurred as a result of the water damage. Kaufman Grain alleged that the landlord had a duty to provide a dry building, both because it had agreed to repair roof leaks and because it was aware of the company’s intent to use the warehouse as a grain storage facility. A.O. Smith disputed these claims. The trial court agreed with Kaufman Grain that the landlord was obligated to provide a dry building and determined the tenant was entitled to damages amounting to $306,558.61.

Landlord Liability for Damage to Tenant Property

With limited exceptions, Illinois landlords are not responsible for repairing or maintaining a rental property unless the lease or other established agreement obligates them to do so. Situations where the landlord is aware of a latent defect on the premises (or should be aware of such defect) are an exception to this general rule.

Moreover, in cases where landlords assume a duty to maintain or repair their property, they must use reasonable care when doing so. Landlords who negligently (carelessly) repair or maintain a property are responsible for any resulting damages.

Furthermore, Illinois landlords have no obligation to ensure that a rented property is appropriate for the tenant’s intended use; rather, tenants are responsible for inspecting the premises to determine whether it meets their needs. Therefore, landlords are not responsible for damages that result when tenants use a property in a manner for which it is ill-suited.

The Decision

A.O. Smith appealed the decision to the Illinois Appellate Court, claiming it was not responsible for providing a dry building and was under no obligation to perform building maintenance.

Kaufman Grain claimed A.O. Smith had a duty to repair the building because of the lease clause stipulating the landlord would repair roof leaks up to $25,000. The tenant also claimed the landlord knew of (or should have known of) the downspout issues and failed to disclose them.

A.O. Smith responded by saying it did not know of any defects when it leased the property. Furthermore, A.O. Smith alleged that Kaufman Grain had failed to reasonably inspect the property prior to entering into the rental agreement. Finally, the landlord said it replaced the leaky downspouts upon becoming aware of them.

The appellate court agreed with A.O. Smith on these points, noting there was no clause in the lease holding the landlord responsible for general repair and maintenance. Additionally, the court noted the landlord had met its obligations, as stated in the lease, to repair the roof. Furthermore, there was no evidence that the roof and/or downspout repairs were performed negligently.

Kaufman Grain also claimed A.O. Smith had a duty to provide a dry storage space because the landlord knew of the tenant’s intent to store grain in the building. However, the appellate court disagreed with this rationale (and the trial court’s finding) by saying it is the tenant’s responsibility to inspect a rental property and determine its safety and suitability—not the landlord’s. Specifically, the court noted that Kaufman Grain had experience with grain storage and thus knew the type of facilities that would and would not be suitable for its purposes. Even with this specialized knowledge, the tenant entered into a rental agreement to lease the warehouse from A.O. Smith.

Additionally, Kaufman Grain claimed A.O. Smith was responsible for damage to its grain as a result of the burst sprinkler pipes. Specifically, Kaufman Grain argued that the lease imposed a duty on the landlord to disable the system because A.O. Smith was familiar with its functioning and would be most capable of preventing issues.

Although the trial court had agreed with this reasoning, the appellate court did not, noting the lease required the tenant to maintain and repair the sprinkler system. Furthermore, the lease gave Kaufman Grain the right to disconnect the system, and the tenant had complete control over the building. According to the appellate court, the lease did not create a duty that obligated the landlord to prevent the sprinkler system from damaging the grain.

While A.O. Smith had no inherent duty regarding the sprinkler system, the appellate court indicated the landlord had created a duty by agreeing to turn it off. Because A.O. Smith carried out this task, it was obligated to exercise reasonable care when doing so. The tenant’s grain was damaged as a direct result of the landlord’s failure to disconnect the system remotely and drain the pipes, which caused them to burst. Since A.O. Smith knew Kaufman Grain needed a dry building, and since the landlord was aware of its tenant’s plans to rewire the building (including the valve heating devices), the court concluded that a reasonable person would have drained the pipes and disconnected the system at a remote point, thus preventing water from entering the building.  Therefore, this action was performed negligently and the landlord is responsible for the resulting damages.

The appellate court vacated the trial court’s judgment in favor of Kaufman Grain. It sent the case back to the trial court to make a limited decision of determining what percentage of the grain damage was caused by the burst sprinkler pipe.

Conclusion

In most cases, Illinois landlords are not responsible when their tenants’ goods or possessions are harmed due to repair or maintenance issues. However, landlords can be held liable when they negligently maintain or repair the rental property and damages occur as a direct result of this carelessness.

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