Landlord Not on the Hook for Construction Defects in Improvements

What Happened: Under a “build to suit” lease, a landlord purchased a property, made a construction contract with a builder chosen by the tenant, Dairy Queen (DQ), financed a reconstruction of the premises to a DQ restaurant, and leased the reconstructed premises to the tenant. Things went awry after DQ moved in and discovered construction defects in the improvements. DQ asked the landlord to fix the problems, but the landlord declined. So, DQ sued the landlord for breaching its purported lease duty to make repairs.

Ruling: The Oregon lower court awarded DQ summary judgment, but the appeals court said the ruling was wrong and reversed it.

Reasoning: Absent a special agreement, commercial landlords in Oregon don’t have a common law duty to repair the premises they lease. The lease in this case said that DQ took the property in “AS IS” condition and didn’t expressly require the landlord to make repairs. Nor did it include any warranties as to the landlord improvements. True, the contractor made such warranties to the landlord as part of the construction agreement. But DQ wasn’t a party to that agreement.

• Cryo-Tech, Inc. v. JKC Bend, LLC, 2021 Ore. App. LEXIS 1014, 313 Ore. App. 413