Imagine this scary real-life scenario: in an effort to lease its land, a landowner (“Owner”) spends millions of dollars to construct a quick lube (or any other single-purpose building) on its property.  Owner then enters into a long-term lease with a quick lube operator (“Operator”).  Unbeknownst to Owner, Operator fails to pay its employees for overtime, meal breaks, or otherwise runs afoul of the myriad of complicated labor laws in California.

The State of California, through the Department of Labor Standards Enforcement, then initiates an enforcement action against Operator which results in a multi-million judgment against Operator.  Operator cannot pay the judgment and goes out of business.

Prior to the enactment of Labor Code section 200.3, this would have caused Owner the significant inconvenience. However, Owner still has its property which is improved with the quick lube facility. Eventually, Owner would find a replacement tenant and, in due time, Owner’s property and its investment in the quick lube facility would start generating cash flow again.

However, following the enactment of Labor Code section 200.3, it may prove impossible for Owner to find a new tenant.  Section 200.3 creates “successor” liability for outstanding labor code violation judgments. This means that a new tenant, even a tenant with no ties to the original Operator, can be held liable for and be required to satisfy the multi-million judgment rendered against Operator as a condition of operating the same type of business from the quick lube facility on Owner’s property. Given the single purpose nature of Owner’s build-out, it would be very difficult (and expensive) to put Owner’s property to another use.

The State of California is aware of this brutal consequence to Owner.  Not only is the State of California not sympathetic to Owner’s plight, it leverages its position to force Owner to resolve the judgment against the now-defunct Operator even though Owner is completely independent of Operator and played no role in Operator’s underlying labor code violations.

So what can an owner do to avoid this devastating outcome?  Short of selling all property owned in California and moving to a more business-friendly state, the owner can make sure that its tenants are financially sound, responsible operators.  It can also seek and obtain indemnity agreements from the individuals responsible for a tenant’s operations.  Finally, the Owner may require its tenants to obtain and maintain EPLI insurance that covers wage and hour claims (assuming such an insurance policy is available). No matter what, it is critical that a landowner, and particularly the owner of a single-purpose property, understand that the obligations and liabilities of its tenants may significantly impact the value and marketability of its land and take whatever measures may be available to guard against the impact of Labor Code section 200.3’s successor liability provisions.