Accepted “As Is”: A Missing Sprinkler System and a $411,000 Lease Judgment

Before a business signs a commercial lease, someone has to find out whether the building can legally be used for what the business plans to do there. A recent Michigan Court of Appeals decision shows what can happen when code-compliance and permitted-use requirements are not resolved before the lease is signed, and the lease says that the tenant takes the space “as is.”

In Trucks Rx, Inc. v. Padilla Investments, LLC (Michigan Court of Appeals No. 375909, decided October 21, 2026), two companies leased a former hardware store in Detroit to sell tires. A few months later, the city ordered the use stopped. The building lacked an automatic sprinkler system that was required to store tires, and the tenants estimated the fix at more than $60,000 and four to six months of work. The tenants stopped paying rent and moved out. An arbitrator ruled for the landlord, and the courts let the award of $411,131.50 plus interest stand against both companies and the two owners who had personally guaranteed the lease.

The decision is unpublished, so it does not bind other Michigan courts. The problem it describes, though, can come up with almost any commercial lease.

What happened

In February 2022, two tire businesses signed a three-year lease for a Detroit building that had previously been a hardware store. Each company’s owner personally guaranteed the lease. The lease limited the use of the property to selling new vehicle tires, required the tenants to pay the insurance, utilities, and property taxes and to maintain the premises, and required them to comply with all laws and ordinances and to bear the cost of doing so. The tenants also acknowledged that they had examined the premises, that the landlord had made no representations about its condition beyond those in the lease, and that they accepted it “as is.”

The tenants moved in and opened for business. Between April and August 2022, the City of Detroit inspected the building three times and issued correction orders directed to the landlord. The June order listed an illegal use of the premises, directed that the present use be discontinued because no permit had been issued for it, and required the landlord to correct the deficiencies and obtain a certificate of compliance. A later order stated that the building’s only legal use was retail.

The tenants stopped paying rent in July 2022 and abandoned the premises in September. The main obstacle, according to the court, was the missing sprinkler system needed to store tires. The landlord’s managing member offered to go with one of the owners to a meeting with city officials to try to resolve the issue, but the owner did not attend. Two months after the tenants left, the landlord obtained a certificate of compliance to use the building as a retail or wholesale store.

The landlord sued for breach of the lease, the tenants counterclaimed, and the parties agreed to send the dispute to arbitration. During the arbitration, both sides agreed that the lease contained their entire agreement and that they had not discussed a fire suppression system before signing it.

What the arbitrator decided

The arbitrator found that the tenants breached the lease when they stopped paying rent and left. He read the lease as unambiguous: the tenants took the premises “as is,” the landlord was not required to do any work for the tenants’ business, and the tenants were responsible for whatever was needed to comply with the law, including submitting plans and specifications for the landlord’s approval. He noted that the tenants never submitted plans and did not attend the meeting with the city. He rejected the tenants’ argument that the lease was void or unenforceable and awarded the landlord $411,131.50 plus interest, holding the two owners personally liable on their guaranties.

One of the tenant companies and its owner then asked the Wayne County Circuit Court to vacate, or set aside, the award. They argued that the city’s ordinance made the property owner responsible for getting the sprinkler permit and that both sides had been mistaken about whether the building could be used to sell tires. The trial court instead confirmed the award, meaning it upheld the award and entered judgment on it. It remarked that the result was perhaps “not fair to either side,” but that the tenants were “in a much better position” than the landlord to know whether their business needed a sprinkler system.

What the Court of Appeals held

Courts rarely disturb arbitration awards

The tenants argued that the arbitrator exceeded his authority and committed a legal error evident from the award. In reviewing those arguments, the Court of Appeals could not revisit his factual findings or reconstruct his reasoning. Under TSP Services, Inc. v. National-Standard, LLC, any legal error had to appear from the award itself and be substantial enough to have changed the result. The question was not whether the court would have read the lease the same way, but whether the arbitrator made that kind of error. The court held that he did not.

The cost of compliance was not an excuse

The tenants argued that a $60,000 sprinkler system and months of downtime made their performance impracticable, if not impossible. The court disagreed. The arbitrator had read the lease to require the tenants, at their own expense, to comply with the laws needed to run their tire business. The lease required no work from the landlord, and the tenants accepted the building “as is” without a sprinkler system. As the trial court had noted, the tenants were in the better position to know what their business legally required. The court also pointed out that the landlord had offered to help with the city and that the tenants did not show up.

The tenants also argued that the lease should be read against the landlord because the landlord’s attorney drafted it. The court declined to consider that argument, because it would require reviewing the arbitrator’s reasoning, which courts may not do.

No mutual mistake

The tenants next argued that both sides had mistakenly believed the building could be used to sell tires, which would allow the lease to be undone. The court compared the case to Sherwood v. Walker, the 1887 Michigan “barren cow” case, where the parties sold a cow both believed could not breed. The cow turned out to be pregnant, and the mistake went to the very nature of what was sold. Here, the court held, the need for a fire suppression system before the tenants could use the space as they wanted did not affect the whole substance of the lease. The lease made the tenants responsible for making the premises suitable for their business, if that was necessary.

The “as is” clause allocated the risk

Finally, the tenants argued that the risk should fall on the landlord, which drafted the lease, limited the use to tire sales, and included the “as is” clause. The court said that any allocation of risk the arbitrator made was part of his factual and reasoning process, which it could not review. It then pointed to Lenawee County Board of Health v. Messerly, a 1982 Michigan Supreme Court decision in which buyers of an apartment property discovered a defective sewage system after the sale. Because their contract said they had examined the property and accepted it in its present condition, the Supreme Court held that they had assumed that risk and could not rescind. The lease here contained similar language, and the court held that the tenants, having agreed to those terms, were not entitled to rescind the lease.

What the court did not decide

• Whether, under Detroit’s ordinances, the property owner or the tenants had to obtain the sprinkler permit. The court treated the lease as allocating that responsibility to the tenants and did not decide the ordinance question.
• How the $411,131.50 award was calculated. The opinion does not break it down.

Because the decision is unpublished, other Michigan courts may consider its reasoning but are not required to follow it. When this article was published, the time to ask the Michigan Supreme Court to review the decision had not yet run.

What this means for commercial leases in Michigan

The holding is narrow: the arbitrator made no legal error that a court could correct when he enforced this lease as written. The points below are general practices for commercial leases that the case illustrates, not rulings from the case.

• Confirm the permitted use before you sign. Ask the city or township whether your specific use is allowed at that address and what it will take to get a certificate of occupancy or compliance. A building that worked for its last tenant may not work for yours.
• Find out what your business needs that the last one did not. The tire business required a sprinkler system that was not already present in the former hardware store. Fire suppression, ventilation, parking, and accessibility requirements can all depend on what you do in the space.
• Read “as is” and compliance clauses together. Accepting the premises “as is” while promising to comply with all laws at your own expense can put the full cost of bringing the space up to code on you. If you are not willing to carry that risk, negotiate it before signing: a contingency for permits, a landlord work letter (the landlord’s written commitment to do specific build-out work), a rent abatement (reduced or paused rent while work is done), or a right to terminate if approvals are denied.
• Do not stop paying rent as a negotiating tactic. Here, the tenants’ decision to stop paying and leave was the breach the arbitrator relied on. If a compliance problem arises, get advice on your options under the lease before withholding rent.
• Know what your guaranty means. Both owners were held personally liable on their guaranties. Our article on personal guaranties in Michigan explains what that signature commits you to.
• Understand what arbitration gives up. An arbitration clause or agreement can be faster and private, but courts rarely disturb an award. Challenges based on the arbitrator’s reading of the contract, like the one here, succeed only if a substantial legal error appears from the award itself. In practice, the arbitration hearing is usually your best chance to win.

Landlords can read the case from the other side. A clearly drafted “as is” clause, combined with a compliance-with-laws clause, gave this landlord a strong position. That protection depends on the actual language of the lease, and any representations a landlord makes outside the lease can create separate issues.

Frequently asked questions

What does “as is” mean in a Michigan commercial lease?

As a general matter, an “as is” clause allocates to the tenant the risk of the premises’ existing condition, without the landlord promising to make repairs or improvements. Its precise effect depends on its wording, and it does not automatically eliminate a landlord’s express promises, obligations imposed by statute, or claims based on fraud or misrepresentation. In this case, the lease paired that clause with the tenants’ acknowledgment that they had examined the property and their promise to comply with all laws at their own expense. The Court of Appeals let stand an arbitration award that read those terms to make the tenants responsible for a required sprinkler system.

Who has to pay to bring leased space up to code?

It depends on the lease. Some leases put that cost on the landlord, some on the tenant, and some divide it. The lease in this case required the tenants to comply with all laws and ordinances and to bear the financial responsibility for doing so, and the arbitrator relied on that language. Review these clauses, and confirm what your use will require, before you sign.

Can a tenant stop paying rent if the city shuts down its business?

Not safely without first understanding the lease. These tenants stopped paying rent after the city ordered the use discontinued, and the arbitrator held that stopping payment and leaving was a breach. Their defenses of impossibility, mutual mistake, and misallocated risk did not succeed. A tenant facing a compliance problem should get legal advice before withholding rent.

Can a court overturn an arbitration award in Michigan?

Only on limited grounds. Michigan’s Uniform Arbitration Act allows a court to vacate an award for reasons such as corruption or fraud, an arbitrator’s partiality or misconduct, refusal to consider material evidence, an arbitrator exceeding his or her powers, the absence of an agreement to arbitrate, or a prejudicial lack of notice. Here, the tenants argued that the arbitrator exceeded his authority by misreading the lease. For that kind of challenge, as the Court of Appeals applied the standard in this case, courts do not review the arbitrator’s findings of fact or reasoning, and a legal error must appear from the award itself and be substantial enough to have changed the result.

Related reading: how a contract lawyer can review a commercial lease before you sign, why an agreement to negotiate is not a lease renewal, what to know before signing a personal guaranty, and working with a Grand Blanc business lawyer.

Please note: This article is provided for general educational and informational purposes only and does not constitute legal advice. Reading it does not create an attorney-client relationship between you and the Law Offices of Maynard F. Newman, P.L.L.C. Trucks Rx, Inc. v. Padilla Investments, LLC is an unpublished decision of the Michigan Court of Appeals; it does not bind other Michigan courts, and outcomes depend heavily on the specific documents and facts. You should consult a qualified Michigan attorney about your own circumstances before acting. This content may also be considered attorney advertising.