The eyes of a potential tenant typically glaze over once they reach the “Indemnity” section of a lease agreement for a prospective commercial space. So says attorney Megan Walker, a member of the real estate and energy sections of Munsch Hardt Kopf & Harr. “The use of successive and seemingly duplicative verbs tires the reader and conceals the objective of the clause,” she says.
In the exclusive commentary below, Walker, who represents owners, landlords, tenants, purchasers, sellers, borrowers and lenders in the financing, leasing, acquisition and disposition on a variety of commercial real estate projects, reviews a tenant’s indemnity obligation under a commercial lease agreement and suggests practical negotiation tools to limit those obligations.
The views expressed below are the author’s own.
A tenant’s indemnification obligation protects the landlord from damages resulting from a legal claim brought by a third party against the landlord and is triggered after trial when damages are determined. For example, if a third party sues the landlord for a personal injury occurring on the leased premises, then the tenant would reimburse the landlord for damages and losses resulting from the claim. Additionally, many tenant indemnity clauses include a “duty to defend” the landlord from a third party claim. A duty to defend is activated when a third party brings a claim against the landlord and means the tenant pays the landlord’s attorney’s fees to defend the claim or the tenant hires an attorney to represent the landlord against the claim.
A commercial lease may include indemnification obligations in multiple sections, requiring the tenant to look for indemnity obligations in sections addressing alterations to the leased premise, tenant’s work to the leased premise or environmental covenants. This article is unable to address all of those specific indemnification obligations, however the following list contains practical negotiation tools for a tenant to limit its indemnity obligation for third party claims brought against the landlord:
Through the addition of causation language in the indemnity clause, a tenant’s indemnity obligation can be limited to third party claims caused by the tenant’s omissions or actions. The causation language creates a direct link between the claim alleged and the tenant’s behavior, meaning the indemnification obligation will only apply to claims that result from the tenant’s actions or failure to act. However, the landlord may not accept this revision as it can result in a dispute about the origin of the claim, which must be resolved before the tenant’s indemnification obligation is activated.
A different approach is to exclude third party claims resulting from the landlord’s negligence or willful misconduct from the tenant’s indemnity obligation. This means if the landlord’s negligent act causes the personal injury claimed by the third party, then the tenant does not have an obligation to indemnify the landlord for that claim. Many landlords will negotiate to exclude only its gross negligence and/or willful misconduct, which is a higher standard of negligence, but not its ordinary negligence. However, it is more common for landlords to accept this exclusionary language rather than linking the indemnity obligation to the tenant’s causation. If the landlord accepts strict tenant causation language, as suggested above, then the exclusion of the landlord’s negligence is not as critical for tenant’s protection.
In addition to the previous two proposed revisions, the tenant’s indemnity obligation should be drafted to only cover third party claims brought as a result of an event occurring on the leased premises. This means if the event alleged in a claim against the landlord occurs in a common area or an area of a project outside of the leased premises, then the tenant’s indemnity obligation will not be triggered. The tenant’s exclusive control only extends to the leased premises, therefore the tenant should not be responsible for events that transpire outside of the leased premises. The tenant can argue the landlord is in the best position to control common areas and manage its exposure to possible third party claims in those spaces.
Alternatively, the tenant can ask for a broad cross indemnification obligation from the landlord or a deletion of the tenant’s indemnification obligations, but almost all landlords will not agree to either approach. In any event, the tenant should always consult with its insurance advisor to verify their insurance policy covers the indemnity obligations included in its commercial lease agreement.
By: Natalie Dolce