Year 2000 Bug and Commercial Leases, Y2K Advisor, August 1999 and LACBA, Real Property Section Review, January 1999

August 1999

By Nadav Ravid

Besides death and taxes, the Year 2000 “bug” (the “Y2K Bug”) can now be added as one of life’s certainties.  Since businesses are heavily dependent on computerized systems in today’s economy, few industries are immune from the effects of the Y2K juggernaut. On January 1, 2000, barring a technological panacea, various businesses which failed to address the problems posed by Y2K may experience substantial hardships ranging from loss of revenue to complete shutdown.  Making matters worse, businesses that address their own Y2K problems may yet find themselves susceptible to economic crises due to business relationships with others who fail to anticipate and adequately resolve their Y2K problems.

The landlord-tenant relationship is one such example where businesses must rely on one another to comply with Y2K problems, particularly in an office building where landlords provide basic services which are critical to tenants’ operations.  As such, it is imperative for tenants to make certain that landlords and property managers identify services that may be vulnerable to the Y2K Bug.  Some basic services which pose Y2K problems in an office building include elevator operations, security systems, building access cards, and heating, ventilation and air conditioning (“HVAC”).

These services may be vulnerable to the Y2K Bug since they are generated by computerized systems or include embedded chip microprocessors which are date sensitive.  The embedded chip microprocessors may pose particular problems due to the fact that such chips may be contained in systems which are not viewed as “computerized” systems, such as garage sweeping machines.  Therefore, such machines may be neglected by parties addressing the Y2K Bug.

An example of a computerized system that may be date sensitive is a security system which is programmed to automatically turn on over the weekends and off during the weekdays.  If the Y2K Bug permeates such a system, the security and access services will turn on and off on unintended dates because the computerized system will interpret January 1, 2000 as January 1, 1900 or another incorrect date.  The reason this will cause problems is that non-compliant Y2K computer systems will interpret the days of the week during the year 2000 as those days of the week during the year 1900, when in fact, the days of the week are different, e.g. January 1, 1900 was a Monday and January 1, 2000 will be a Saturday.  At best, computerized systems sensitive to Y2K will continue to operate with jumbled dates.  At worst, the computerized systems will shut down completely.  Although such services may be repaired once the problems are discovered, landlords must accept the fact that a significant amount of time will be required for such repairs.

Many leases contain clauses which can be interpreted as obligating landlords to be fully Y2K compliant or at least subjecting landlords to liability unless they are Y2K compliant.  For example, many leases contain indemnification clauses which often impose liability upon landlords who act negligently.  Arguably, landlords would be negligent if they failed to address, if not remedy, the Y2K Bug.  Therefore, sophisticated landlords will recognize that it is in their best interests to proactively address the Y2K problem or else potentially risk incurring substantial liability.

Below is an overview of some of the general areas of services landlords need to address before the Y2K Bug bites, followed by examples of lease provisions which landlords and tenants may want to incorporate into newly executed leases.

Elevator Service

Many building elevators are operated by date sensitive computerized systems.  If the Y2K Bug causes elevators to malfunction, landlords will likely find themselves subjected to a myriad of liabilities.  If the Y2K Bug causes the elevators to shut down, then tenants who are left without reasonable access to their offices may sue landlords for breach of their leases’ covenants of quiet enjoyment.  If a tenant moves out as a result of lack of access to its office, then, depending on the language of the lease, the landlord’s liability in such cases may range from the costs associated with locating comparable space for the tenant to tenant’s business losses caused by the landlord’s “eviction.”

Security Systems

Security systems (such as alarms) may be as critical to landlords’ successful operation of a building as elevator services.  Although some businesses provide their own security systems, there are many businesses that rely solely on landlords for such services.  If a building’s security system malfunctions, several problems may occur.  First, alarm systems may shut down resulting in increased risk of undetected theft or burglary.  Second, as discussed earlier, if alarm systems do not shut down but continue to operate, such systems may not operate as intended.  As a result, tenants may trigger the alarm every time a door to the exterior of the premises is opened.

Access Cards

The Y2K Bug may affect building systems using access cards to provide entrance to a building and access to various floors of a building.  At least two problems may arise if access cards are not operational.  First, tenants may find themselves locked out of their offices.  Second, if usage of access cards is suspended but not replaced by other means, uninvited visitors may have access to tenants’ offices.

HVAC

After January 1, 2000, the winter weather will likely bring cold temperatures throughout the U.S.  Unless heat and ventilation are provided, tenants may be forced to stay away from their offices.  Notwithstanding the expected cold temperatures during January, the temperatures in some areas throughout the U.S. may remain warm, thereby requiring air conditioning services to tenants.  Air conditioning services may be especially important to those tenants who maintain computer systems which require a regulated temperature.

Additional Services

In addition to the above discussed services, lighting, power and fire control systems may be susceptible to the Y2K Bug. Computerized systems tied to a building’s lights may cause lights to turn on and off on unintended days.  While power and fire control systems may not be date sensitive, they may nonetheless have some date component to the program which may cause the entire system to shut off completely if there is some glitch. In order to avoid these worst case (but realistic) scenarios, landlords and property managers must test and repair all such systems.

Computer Applications

In addition to the above-mentioned potential service interruptions, landlords, property managers, and tenants should anticipate additional areas for concern with respect to computer applications.  Many landlords and property managers use various computer applications to compile date-sensitive information. For example, landlords and property managers use computer applications to determine when cost of living adjustments take effect, when leases terminate, or when tenants’ rights to exercise lease extension options terminate.

Paying for Repairs

Assuming landlords and property managers test and fix anticipated Y2K problems, there will likely be peripheral concerns such as determining which party shall bear the additional costs incurred by landlords in providing such services.  Undoubtedly, landlords will try to pass through such costs to tenants under, among other lease provisions, the operating expenses provision commonly found in leases.  The problem for landlords, however, is that most current leases are silent as to whether costs associated with Y2K problems are included under the operating expenses which tenants are obligated to pay.  Landlords will likely take the position that the costs associated with the Y2K Bug are repairs or upgrades which are typically permissible costs that landlords pass through under operating expenses; however, tenants will no doubt argue that such costs are in fact “capital costs” which are impermissible pass-throughs in many leases.  In order to mitigate such likely disputes, landlords and tenants should communicate with one another their positions on this matter as soon as possible.

New Leases

Landlords and tenants who are currently negotiating leases should address the various areas raised by the Y2K Bug.  Below is an amalgamated version of various lease provisions addressing the Y2K Bug which landlords and tenants may want to consider incorporating into their leases. Note that the lease provisions below are drafted in favor of a landlord but may be made reciprocal by replacing the word “Landlord” with “Tenant.”

Year 2000 Compliance

(a)            Representations, Warranties and Covenants; Indemnity.  Tenant represents, warrants and covenants to Landlord that: (i) Tenant has undertaken a comprehensive assessment of Tenant’s Information Technology and has identified all Material Third Parties; (ii) Tenant is, or shall be, prior to December 31, 1999, Year 2000 Compliant; and (iii) Tenant has taken all reasonable steps to determine whether, and has no reason to believe that, any Material Third Party will not be Year 2000 Compliant on or before December 31, 1999.  Tenant hereby agrees to indemnify, defend and hold Landlord harmless from all Claims relating to, or resulting from, any such representations, warranties or covenants being untrue or from any default in the representations, warranties and covenants contained in the previous sentence.

(b)           Affirmative Covenants.

(i)         Compliance Plan.  At Landlord’s request, Tenant shall furnish Landlord with a copy of Tenant’s project plan and timetable for ensuring that Tenant is Year 2000 Compliant on or before September 30, 1999.
(ii)       Assessment of Material Third Parties.  At Landlord’s request, Tenant shall furnish Landlord with a copy of Tenant’s project plan and timetable for assessing whether each Material Third Party is or will be Year 2000 Compliant on or before September 30, 1999.
(iii)          Testing.  By June 30, 1999, Tenant shall complete testing of all of Tenant’s Information Technology to ensure that Tenant is Year 2000 Compliant, and Tenant shall furnish Landlord, at Landlord’s request, confirmation in a form reasonably satisfactory to Landlord that such testing has been satisfactory completed.
(iv)          Further Information.  At Landlord’s request, Tenant shall furnish Landlord with such additional information regarding Year 2000 Compliance as Landlord requests from time to time.

(c)            Exculpation.

(i)             To the fullest extent permitted by law, Tenant, on Tenant’s behalf and on behalf of all Tenant Parties, waives all Claims against Landlord and Landlord Parties arising out of or related to Landlord’s failure to be Year 2000 Complaint.
(ii)           Tenant acknowledges and agrees that the foregoing release includes without limitation, Claims for, and Tenant knowingly and voluntarily assumes the risk of, and agrees that Landlord and Landlord Parties shall not be liable to Tenant and/or Tenant Parties for, any of the following consequences arising out of, or related to Landlord’s failure to be Year 2000 Complaint:  (i) injury to or death of any person; or (ii) loss of, injury or damage to, or destruction of any tangible or intangible property, including, but not limited to, the resulting loss of use, economic losses, and consequential or resulting damage of any kind from any cause.
(iii)          Landlord and Landlord Parties shall not be liable, regardless of whether the liability results from any active or passive act, error, omission, or negligence of any of Landlord or Landlord Parties; or is based on claims in which liability without fault or strict liability is imposed or sought to be imposed on Landlord or any of the Landlord Parties.

(d)           Operating Expenses.  Landlord shall be entitled to, but shall not be obligated to, incur any costs directly or indirectly to ensure that any building system (including, without limitation, elevator equipment, security devices, alarm systems, HVAC equipment, and utility equipment) will be Year 2000 Compliant (“Y2K Costs”).  All Y2K Costs shall be included within the definition of Operating Expenses in the year that Landlord incurs such costs.

(e)           Definitions.

(i)             Year 2000 Compliant.  The term “Year 2000 Compliant” means that all Information Technology used by, or on behalf of, such Person, in such Person’s business activities shall:  (i) accurately process all date and time data (including, but not limited to, calculating, comparing and sequencing) including, without limitation, the date and times between the years 1999 and 2000 and all the dates and times thereafter (in either direction, forward or backward); (ii) accurately process leap-year calculations for date and time data; and (iii) when used in combination with any other Information Technology of an entity beyond such Person’s control, accurately process date and time data provided such other entity’s Information Technology properly exchanges date and time data with such Person.
(ii)           Information Technology. The term “Information Technology” means any and all systems, facilities and devices by which information (including data, text and images) is generated, stored, processed, displayed, received or communicated, including, without limitation, computer. Hardware, computer software and any equipment or machinery which incorporates a microchip.
(iii)          Material Third Party.  The term “Material Third Party” means any of Tenant’s customers, patients, information exchange partners, suppliers and vendors which use Information Technology and are material to Tenant’s business.
(iv)          Person.  The term “Person” means and includes natural persons, corporations, limited liability companies, limited partnerships, general partnerships, limited liability partnerships, joint ventures, trusts, land trusts, business trusts, or other organizations, irrespective of whether they are legal entities, and governments and agencies and political subdivisions thereof.
(v)           Claims.  The term “Claims” means any claims, losses, costs, damages, expenses, liabilities, liens, actions, causes of action (whether in tort or contract, law or equity, or otherwise), administrative proceedings (including informal proceedings), judgments, punitive damages, charges, assessments, fines, and penalties of any kind (including consultant and expert expenses, court costs, and attorney fees), together with all other costs and expenses of any kind or nature that arise during or after the term of this Lease.