Avoid Responsibility for Damage Suffered by Your Tenant

By virtue of a legal concept called “indemnity,” a commercial property owner sometimes can make its tenant financially responsible for damages the owner suffers as the result of any party's actions. Owners generally try to secure their right to this kind of reimbursement by including an indemnity provision in their leases.

For example, let's say the property a commercial tenant leases is damaged as a result of a plumber's negligence. The lease between the owner and its tenant is likely to include a clause that imposes financial responsibility for the damage on the tenant, regardless of the fact that the damaged property ultimately belongs to the owner. The courts in many states are likely to support imposing liability on the tenant.

Property Damage Caused by Owner

There are certain types of damage that the courts in most states will not allow owners to pass off, no matter what the owners’ leases say. For example, almost all states prohibit a commercial property owner from protecting itself from liability for its own gross negligence or intentional misconduct, says Marie Moore, a member of the New Orleans-based law firm Sher Garner Cahill Richter Klein & Hilbert, L.L.C.

“Courts typically look unfavorably on someone whose gross negligence caused damage,” explains Charles Fulton, a retired named partner at Manning, Fulton & Skinner, P.A., in Raleigh, N.C. “It's unsettling to think that a person can escape liability for gross negligence or intentional misconduct because of an indemnification clause.”

The case law or statutes in some states go even further to limit an owner's chances of avoiding liability by denying commercial property owners the right contractually to force tenants to pay for any owner-caused property damage.

Until as recently as last year, Illinois was among the states that prohibited a commercial real estate owner's attempts to make a tenant financially responsible for property damage caused by the owner. The applicable statute has since been amended to allow an owner to be indemnified for damage to the tenant's property, even if the owner's own negligence caused that property damage.

Example: The property a commercial tenant leases is damaged as a result of the owner's maintenance team's negligence. The lease between the owner and its tenant is likely to include a clause that imposes financial responsibility for the damage on the tenant, regardless of the owner's involvement.

“I think the original Illinois law was intended to protect residential tenants who don't necessarily have insurance,” says Sid Saltz, senior counsel in the Chicago office of Holland & Knight. “It doesn't make sense to have it apply to commercial tenants,” according to Saltz, who says he lobbied for the change.

Personal Injury Damage Caused by Owner

There's one type of damage that the courts in most states, including Illinois, would probably refuse to uphold: an indemnity clause that makes a tenant responsible for any personal injury caused by the owner.

Example: A shopper is injured in the tenant's space. The injury the shopper suffers is the result of the owner's maintenance team's negligence. The lease between the owner and its tenant may include a clause that imposes financial responsibility for the personal injury on the tenant, regardless of the owner's involvement.

“It might be hard for owners to escape liability for the personal injury that they cause,” Saltz says. Nevertheless, he tries to secure for his owner-clients the chance of being indemnified for both the property damage and any personal injuries that occur on their tenants’ premises.

Saltz drafted the Model Lease Clause at right, which contains language that, in essence, says, “If the loss is caused by the owner, and it exceeds the amount of the tenant's insurance coverage, the owner pays the excess.” Saltz explains that—in his view—this language should be enough to persuade a court that “it's not really the tenant that bears any risk for an owner-caused loss; it's the tenant's insurer that's being paid to assume that risk.”

Saltz's attempts to secure indemnity rights for his clients are not limited to the language in the lease's indemnity clauses. He often asks the tenant's counsel to include his owner-clients as named insureds, instead of just additional insureds, on their insurance policies.

“Then the owner's risk is clearly covered because it's an insured risk in the policy,” Saltz says. “The concept is that the tenant should bear the risk of anything that happens on or about its premises, even if the loss is caused by the owner,” he says.

However, most tenants object to making the owner a named insured on their policies, according to Saltz. In the end, it all comes down to bargaining power. “Indemnity provisions usually depend on a variety of things, such as the marketplace, the leverage that each party has, and how hungry the management is to get the leasing assignment,” says Fulton.

Insider Sources

Charles Fulton, Esq.: Retired Named Partner, Manning, Fulton & Skinner, P.A.; Raleigh, NC

Marie Moore, Esq.: Member, Sher Garner Cahill Richter Klein & Hilbert, L.L.C.; New Orleans, LA

Sid Saltz, Esq.: Senior Counsel, Holland & Knight; Chicago, IL