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Liability of Successor Lessors for Construction Defects in Tennessee

A recent federal case from the Sixth Circuit Court of Appeals which involved retail space in Brentwood, Tennessee is worth paying attention to if you are, or might be, a landlord or tenant under a commercial lease in Tennessee. Here are the basic facts:

• Sports Authority entered into a lease agreement for commercial space as the tenant
• The shopping center where the leased space was located had not been built as of the signing of the lease agreement
• Hendon Investments was the lessor (or landlord)
• Under the lease agreement, Hendon (lessor) was required to construct the building according to plans and specifications
• The shopping center was built, and Sports Authority began occupancy
• DD acquired the shopping center from Hendon and assumed Hendon’s lease obligations
• After acquiring the property, DD had the shopping center roof inspected and no problems were found
• A severe rainstorm caused part of the roof over the space of Sports Authority to collapse and damage the property of the Sports Authority
• Sports Authority’s insurance company paid a substantial claim
• Sports Authority’s insurance company then filed a breach of contract case against DD, on behalf of Sports Authority, alleging that DD was liable because it assumed the lease, and the lease required the lessor to construct the roof according to certain plans and specifications
• The insurance company alleged that Hendon did not construct the roof according to the agreed specifications
There were numerous issues in the case, but, for the sake of time and space, this blog discusses only one. That issue is: Should DD, the landlord who took on the lease by assignment after the building was built by the original lessor, Hendon, be liable for Hendon’s breach of contract for failing to build the roof according to plans and specifications?

The Sports Authority’s insurance company argued that Hendon’s (the original lessor’s) promise to build according to the agreed upon specifications ran with the land and was capable of successive and independent breaches. DD, it alleged, breached the contract when it assumed the lease because, at that time, the roof was not constructed according to specifications.

DD argued that the breach of the lease agreement to follow the agreed upon specifications could occur only once, and that it occurred before DD was assigned the lease. Therefore, DD asserted, it was not liable.
DD won the case by a 2-1 margin.