Draft Airtight Indemnification Clause

When you lease space to a tenant, it’s impossible to predict whether you’ll experience the unpleasant repercussions of accidents, injuries, or criminal acts that can be attributed to the tenant. These events can be costly, but as with most other risks involved in leasing space, you can plan for the worst and hope for the best. An airtight indemnification clause can ensure that you won’t be left paying the price for the events caused by your tenant.

Chain Reaction Results from Poorly Drafted Provisions

An indemnification provision in your lease would permit you, after you’ve been compelled to pay for the results of wrongdoing by your tenant, to recover the damages you’ve paid to an affected injured party, or costs you had to absorb yourself. But the key is to negotiate an indemnification clause that’s broad enough to cover potential events and that specifies what you may do to resolve them, like having the right to choose your own legal professionals.

Owner-favorable indemnification clauses are important for several reasons. The owner wants to be indemnified by its tenant for any claims made as the result of any act or omission that should be the tenant’s responsibility, New Jersey attorney Steven A. Weisfeld explains. But if the indemnity clause isn’t broad enough, it can create several layers of difficulties for the owner. “The landlord can find itself in the position of having its insurance company be responsible for the claim, and the rate of insurance may increase as a result,” he says.

While the landlord may be able to pass along the increase in cost to the tenants, “there’s no benefit to the landlord to be responsible for an increase in costs,” says Weisfeld. He also warns that, if the indemnity clause isn’t broad enough, then the landlord may also be in a position of not having adequate insurance to cover the claim at issue.

Tailor Indemnity Protections to Business, Type of Space

Typically, a commercial lease contains a standalone provision entitled “Indemnity,” although sometimes indemnity is covered in the insurance provision, Weisfeld points out. (For a standalone provision, see our Model Lease Clause: Protect Yourself from Paying for Tenant’s Mistakes.) However, various clauses through the lease typically address some form of indemnity as well, including, but not limited to, the brokerage provision, the holdover clause, and the environmental clause, he says. Although indemnity provisions might appear in several sections of your lease to address specific issues, such as responsibility for environmental damage or the ramifications of the tenant holding over its space, consider also tailoring indemnity provisions to the tenant’s particular type of business. After all, some businesses are more likely to experience dangerous situations. Weisfeld has seen certain indemnity clauses include criminal actions directed against banks or other tenants open beyond typical operating hours.

Special or unusual indemnity clauses for risky tenants can help you avoid the risk of using a so-called boilerplate indemnity clause that you’ve used with typical tenants at your center. But owners should think carefully about not only the type of business, but also what the tenant is leasing, stresses Weisfeld. For example, if the tenant is leasing an entire outparcel, and as a result has more extensive obligations in the lease, the indemnification clause should be broad enough to cover a wider variety of acts or omissions because the tenant’s obligations are typically greater than the landlord’s obligations, he explains. 

Be Prepared for Pushback from Tenant

As with many types of lease provisions, whether you get the exact protections you want will depend partly on how much leverage the tenant has. “Tenants especially do not want to indemnify the landlord for anything within the demised premises if the same is not the tenant’s responsibility.

For example, if somebody slips and falls in the demised premises due to a leaky roof, and it’s the landlord’s responsibility to fix the roof, tenants will often argue that the landlord should be responsible to indemnify the tenant,” Weisfeld notes. He says that, more generally, tenants want to carve-out the owner’s acts or omissions from the scope of the indemnity (whether or not they are required by state law). Tenants with a good deal of leverage may even want to carve-out acts or omissions of third parties—that is, limit the scope of the indemnity to acts arising from the tenant’s negligence or willful acts—so be prepared for that argument if you’re dealing with a large national, anchor, or other influential tenant. Tenants often also object to indemnifying the owner for anything that happens “about the Demised Premises” because of the vagueness of the word “about,” Weisfeld points out.

So which of those items can you give in on while still getting a favorable clause for yourself? Weisfeld says that landlords can exclude acts caused by the landlord, the landlord’s agents, or other tenants from the indemnification clause. However, he emphasizes that owners should never agree to exclude from the indemnity clause “Tenant’s or Tenant’s agents’ acts,” or “Tenant’s breach of the lease.”

You won’t have to negotiate only your indemnification; some tenants ask to be indemnified for certain losses, expenses, or liability. Weisfeld points out that large tenants often ask that the indemnification clause be mutual. If you must agree to indemnify the tenant, try to limit the indemnification to a high standard—such as acts caused by your gross negligence or willful misconduct. 

Practical Pointer: Be aware that there are events that you can’t include in the indemnity clause, such as those that were caused by your own negligence or gross negligence. For example, in New Jersey, it is against public policy for a tenant to indemnify a landlord for the landlord’s gross negligence. So remember to discuss state law on that issue with your attorney when drafting your lease. 

Reinforce Protections in Clause

Regardless of how good your indemnification clause is, there are two key things to keep in mind. Make sure that you have a solid insurance provision to back it up, Weisfeld stresses. But be aware that insurance may not provide coverage to the full extent of the indemnification in the lease, he cautions. And make sure that your clause includes a provision permitting you to recover your attorney’s fee from the tenant.

Insider Source

Steven A. Weisfeld, Esq.: Beattie Padovano, LLC, 50 Chestnut Ridge Rd., Ste. 208, Montvale, NJ 07645; www.beattielaw.com.