## Facts

- A commercial landlord leased a Los Angeles building of unreinforced masonry construction to a tenant for operation of a bar and cabaret.
- The lease used a preprinted “net” form but was materially modified, including deletion of certain landlord warranty provisions and adjustment of property-tax responsibility (tenant paid only increases above a base amount).
- The tenant agreed to accept the premises “as is,” to comply with governmental requirements regulating the tenant’s use, and to maintain and repair the premises; the landlord was largely relieved of repair obligations.
- After the tenant renewed, the City required seismic upgrading under a general earthquake hazard reduction program enacted before the lease.
- Compliance required major structural work (reconstructing the frame and replacing the roof) costing about $34,450, which the landlord paid.
- The landlord sued for reimbursement, alleging the lease shifted the government-mandated seismic costs to the tenant.
- The trial court and Court of Appeal ruled for the landlord; the state supreme court granted review and reversed.

## Issues

1. Whether a commercial tenant’s duties to comply with laws regulating the tenant’s use and to repair/maintain premises require the tenant to pay for government-mandated, use-neutral seismic reconstruction of the building.

## Decision

- The court reversed and directed entry of judgment for the tenant.
- The tenant’s compliance-with-law obligation, limited to requirements regulating the tenant’s use, did not include structural seismic upgrading imposed because of the building’s construction type rather than the tenant’s business.
- The lease’s repair/maintenance provisions did not shift to the tenant the cost of major structural reconstruction characterized as a capital improvement.
- The court declined to treat the lease’s “net” label as dispositive and instead relied on the lease’s short term and other retained landlord obligations to infer no intent to shift substantial structural code-compliance costs to the tenant.

## Legal Principles

- Clauses requiring a tenant to comply with laws “regulating [the tenant’s] use” are generally construed to cover use-related regulations, not generally applicable structural safety mandates unrelated to the tenant’s particular use.
- General repair and maintenance covenants in commercial leases do not, without clearer allocation, transfer responsibility for substantial, government-ordered structural reconstruction or capital improvements to the tenant.
- Allocation of government-mandated alteration costs depends on the lease as a whole and surrounding circumstances, including (i) the magnitude of the cost relative to rent, (ii) the lease term, and (iii) whether the primary benefit accrues to the owner’s reversionary interest.
- A lease’s characterization as “net” is not controlling; courts assess the actual distribution of taxes, insurance, repairs, and benefits to determine intended risk allocation.

## Conclusion

The court held that the tenant was not required to reimburse the landlord for seismic reconstruction mandated by a general safety program because the lease’s compliance and repair provisions did not extend to major, use-neutral structural alterations that primarily benefitted the owner, and judgment was ordered for the tenant.


Hadian v. Schwartz, 884 P.2d 46 (Cal. 1994)