The federal appeals court over the Carolinas, the Virginias, and Maryland weighed in recently on what it takes to amend a commercial lease—and settle the perpetual fight over maintenance and repairs—as well as whether a racist joke is grounds for an automatic firing. The U.S. Court of Appeals for the Fourth Circuit addressed those issues in Expo Properties v. Experient and Bazemore v. Best Buy. Its rulings contain significant holdings for the commercial real estate industry specifically and employers generally.

Settling the Landlord-Tenant Fight Over Repairs

Expo Properties v. Experient involves the common fact pattern of a landlord and tenant fighting over who should pay for repairs and maintenance at the conclusion of a lease. In March 1994, the original tenant and landlord entered into a lease for an office building complex in Frederick, Maryland. The lease contained the following key provisions:

1. Article 6 provided the tenant shall keep the exterior and interior of the premises, including the HVAC, "in good order and condition," and shall surrender the same at the expiration of the lease "in the same good order in which they are received."
2. Article 8 provided the tenant shall make all necessary repairs to the roof, exterior walls and foundations. Landlord has the right to perform this work during the lease term.  Tenant shall pay for the cost of this work as additional rent.
3. Article 24 provided that tenant shall return the premises "in as good condition as when tenant originally took possession, ordinary wear … excepted."

In 1998, the landlord sent a letter to the tenant stating that the lease "makes it clear" that the tenant must pay for all repairs, maintenance and capital improvements.

In 2006, the tenant signed an estoppel certificate. The estoppel certificate stated that the original lease had been "modified and amended" by various documents, including the 1998 letter. The estoppel certificate also stated, "Tenant acknowledges that all repairs … are the responsibility of Tenant …." In 2011, the parties entered into a fifth amendment to the lease, defining the lease to include the previous amendments and the estoppel certificate.

In 2012, as the tenant was preparing to vacate the premises, the landlord and tenant began to dispute which party should be responsible for repairs to the premises. The tenant did not perform the requested work, sparking the dispute between the parties.

On April 15 of this year, the Fourth Circuit held that the 1998 letter and estoppel certificate did not amend the lease. The court noted that neither document specifically stated how it would modify the lease. In addition, the court said the documents were signed by one party only, whereas the other amendments to the lease were signed by both parties.

The court also held that the 1998 letter and the estoppel certificate were inadmissible evidence because the lease was not ambiguous. The court rejected the landlord's arguments that Article 8 conflicted with other lease provisions.

Further, the court held that the tenant was not responsible for the structural and HVAC repairs.  The court held that the landlord failed to exercise its option under Article 8 to perform the structural work during the lease term, and therefore the tenant was not responsible for such costs.

The court also held that the specific provisions of Article 24 took precedence over the general provisions of Article 6. As such, the tenant was required to return the premises in the same order and original condition, except for ordinary wear. In affirming the district court, the Fourth Circuit held that the replacement of the HVAC would constitute "upgrades" not required under the lease.

Handling an Employee Who Made a Racist Joke

Bazemore v. Best Buy involves a question that employers increasingly face in lawsuits: What is the legal bar for plaintiffs to demonstrate a hostile work environment based on race? In recent years, the Fourth Circuit has lowered that bar. When the alleged conduct involves use of racial slurs, the court has concluded that even one use of such language in the workplace can be sufficient to meet this standard under Title VII of federal civil rights law. In this case, however, the Fourth Circuit refused to extend that reasoning to require automatic termination of an employee who used such language.

Erika Bazemore, an African-American woman, worked at a Best Buy in Waldorf, Maryland. She alleged that a co-worker told a racist and sexist joke in her presence that included the "N-word." After she complained to human resources, the co-worker was given a final written warning concerning her behavior, and no further incidents were reported. The plaintiff sued, claiming that Best Buy's failure to terminate the offending co-worker resulted in a hostile and offensive work environment by forcing her to continue to work with that employee.

On April 21, the Fourth Circuit affirmed dismissal of the complaint. The court noted that the warning provided to the employee was the final step before termination, and that it had apparently proven effective in preventing further incidents. "Importantly, (the plaintiff) does not assert that (the co-worker), or anyone else at Best Buy, harassed her again," the court wrote.

The Fourth Circuit also noted that Title VII does not prescribe employers' reactions to violations of their equal employment opportunity policies, and that a federal court doing so would result in micromanagement of employers' human resources practices. "As a matter of law, Best Buy is only required to discipline in a way reasonably calculated to end the behavior," the court wrote. "Bazemore does not allege that Best Buy failed to do this."

Takeaways

There are practical takeaways from the two rulings for landlords, tenants, a broad range of employers, and their attorneys in Carolinas, the Virginias, and Maryland.

Parties to a lease, or any other contract for that matter, should confirm that any amendments comport with state law. Inserting purported amendments in an estoppel certificate may not help the landlord down the road. Courts are more likely to enforce contracts if they are signed by all parties.

In addition, landlords and tenants are better off when the repair and maintenance provisions clearly spell out the parties' respective obligations. Landlords and tenants should check the repair and return provisions during the term of the lease so that they preserve their rights. Unless the Supreme Court says otherwise, the landlord in Expo Properties v. Experient will be stuck with the bill because it did not exercise its option to perform the structural work—and charge the tenant with additional rent—during the lease term.

In Bazemore v. Best Buy, the Fourth Circuit signaled that as long as the measures taken to address racial harassment are effective, the court will not second-guess them. However, the decision may have been different if the joke was told by a supervisor. In that situation, the implied authority that a manager may hold over minority employees could result in a conclusion that a warning is not adequate to address the situation and to prevent future occurrences.

Morgan Rogers, Jonathan Crotty and Alli Davidson are attorneys at Parker Poe in Charlotte, North Carolina. Morgan focuses on commercial litigation and real estate transactions and can be reached at [email protected]. Jonathan leads the firm's Employment Practice and can be reached at [email protected]. Alli focuses on business litigation and can be reached at [email protected].