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Out-of-possession Owners With HUD Contracts Not Out-of-luck

Author: Po Waghalter

January 8, 2020 11:00am

The Court of Appeal recently granted a win to property owner lessors with Housing and Urban Development (“HUD”) contracts[1]. Specifically, the Court decided that premises liability would not be expanded to out-of-possession lessors simply based on covenants in their contracts with HUD.

In Henry v Hamilton Equities, Inc., Plaintiff Carol Henry alleged she was injured from a slip-and-fall at a nursing home leased by Grand Manor Nursing and Rehabilitation Center (“Grand Manor,”) her employer. Grand Manor leased the premises from the owners Hamilton Equities Company (“Hamilton”) and Suzan Chait-Grandt. Hamilton had a mortgage insured by the FHA, a part of HUD, with contractual terms requiring Hamilton maintain the premises in “good repair and condition.” Plaintiff claims Hamilton is liable based on the covenant with HUD, with attention to the covenant to maintain the premises in “good repair and condition.” Thus, at issue was whether an out-of-possession property owner with a HUD financed mortgage, which includes a covenant to keep the mortgaged property in “good repair and condition,” may become liable for injuries on the premises, based on the covenant. In brief, the Court decided: No.

The general rule as to landowner liability is that while there is a duty to maintain property in a reasonably safe condition, this “duty is premised on the landowner’s exercise of control over the property, [because] the person in possession and control of property is best able to identify and prevent any harm to others‘” (Id., quoting Butler v Rafferty, 100 NY2d 265, 270 [2003]) Emphasis added. Moreover, a “landowner who has transferred possession and control is generally not liable for injuries caused by dangerous conditions on the property” (id.).

Despite this general rule clearly shielding the extension of liability to the lessor property owners, plaintiff sought to extend liability based on a limited exception carved out by the Court in Putnam v Stout, 38 NY2d 607, 617 [1976]. In Putman, the Court created a very limited exception in instances where there is a contractual failure to repair that creates an unreasonable risk to persons on the land. (Id.) Specifically, the Putnam Court held that a landlord “may be liable for harm caused to others on [the] land with the permission of the [tenant], on the basis of [a] contract to keep the premises in good repair” (Putnam, 38 NY2d at 611) wit the satisfaction of three requirements: (1) the lessor “has contracted by a covenant in the lease or otherwise to keep the land in repair,'” (2) “the disrepair creates an unreasonable risk to persons upon the land which the performance of the lessor’s agreement would have prevented, and'” (3) the ” lessor fails to exercise reasonable care to perform [the] contract'” (id. at 617, quoting Restatement [Second] Torts § 357).

Plaintiff argues that the regulatory agreement/contractual terms between Hamilton and HUD created such a duty to repair that it would fall under the limited exception to the general rule that a landlord not in possession of a premises is not liable for injuries from dangerous conditions on the premises.

The Court of Appeal disagrees. The Court reasoned that the covenant between the property owner and HUD does not create an exception to the general rule that liability is premises on a “landowner’s exercise and control over the property.” Gronski v County of Monroe, 18 NY3d 374, 379 [2011]. Simply, such a covenant between a property owner and HUD does not create a duty as to dangerous conditions on a premises, where that premises is in the possession and control of their tenant. Thus, the duty to maintain the premises would have fallen on the individual or entity in possession and control –not the lessor owners, who transferred possession and control, but their lessee, Grand Manor.

Bottom Line

The Court clarified that regulatory agreements between HUD and property owners do not qualify as covenanted exceptions to the general rule that an out-of-possession landlord is not liable for injuries from conditions of a demised premise.

The Courts thus grant a win to property owners by declining to extend liability based on their regulatory agreement with HUD. In so doing, much litigation is likely prevented, and property owners can move forward with FHA-HUD loans without fear of getting sued when their tenants fail to keep their leased property in good repair.

 

[1] Federal Housing Administration (“FHA’) contracts are a part of HUD.

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