Indemnification Clauses in Commercial Leasing

Indemnity clauses in general are designed to shift liability for claims asserted by third parties from one party to another. In the commercial lease context, tenants typically agree to both indemnify landlords and to defend and hold them harmless for all claims arising out of tenant’s operation of business on the leased premises, tenant’s maintenance of the premises and the negligence and/or misconduct of the tenant or its representatives, employees, agents and contractors (and sometimes even the tenant’s customers). In essence, the tenant agrees to defend the landlord for specified damages or claims. While it may seem absurd to a prospective tenant, commercial leases sometimes contain language requiring tenants to indemnify landlords for claims for liabilities arising out of occurrences in the common areas controlled by landlords and even for those liabilities arising out of the landlord’s own negligence.

outlet-center1-52397-m.jpgMost importantly, under California law, these types or indemnification clauses are generally enforceable, at least in the commercial lease context. Of course, there are public policy considerations even where commercial leases are concerned. For instance, landlords cannot contract against future claims for their own intentional misconduct or gross negligence. It is advisable, given this limitation, for tenants to seek reciprocal indemnification language for any intentional conduct or gross negligence by landlords. Moreover, depending on the parties’ relative bargaining power, some landlords may be willing to indemnify tenants for their own negligence and even the negligence of those under their control where the damages arise from occurrences in the common areas.

From the landlord’s perspective, the idea is to shift liability to the tenants who conduct business on the premises daily. This reallocation of risk is guided by the parties respective insurance coverage. From a practical standpoint, the shift in responsibility is a shift in insurance obligations. If the lease shifts liability for “any and all” claims arising out of anything to tenant, it becomes incumbent upon the tenant to insure against “any and all” claims. In fact, most commercial leases specifically require suitable coverage. As such, allocation and the actual procurement of adequate insurance coverage is essential for both landlords and tenants.

In addition to indemnification, most commercial leases further redistribute risk via waiver clauses. Waiver clauses will typically relieve landlords of all claims that may be asserted by tenants against landlords for liabilities arising out of the tenants’ use of the leased premises, and sometimes (again depending on the parties’ relative bargaining power), reciprocal waiver clauses will relieve tenants for all claims asserted by landlords against tenants for liabilities arising out of incidents in the common areas. While waiver clauses are not the subject of this article, they play an important part in balancing the parties’ risks in commercial leasing.

Indemnification clauses needs to be tailored to the actual circumstances surrounding each specific negotiation taking into account the objectives of the parties and current law. Merely cutting and pasting boilerplate language is insufficient. For instance, indemnification provisions commonly include the phrase “caused in whole or in part” where a tenant agrees to indemnify the landlord for accidents caused by the tenant’s business. The phrase would not be suitable if it is the parties’ intention that they share responsibility for accidents caused by both the tenant and landlord. “Caused in whole or in part” by tenant’s business implies that the tenant will indemnify the landlord even where the landlord is partly at fault. The choice of language is important in allocating risk as intended by the parties.

Ultimately, indemnification provisions can be and often are lengthy and complex. It is therefore critical for both landlords and tenants to take the time to evaluate the terms closely and ensure that they adequately memorialize the parties intentions regarding the allocation of risk. It is of course advisable to consult an experienced San Diego commercial lease lawyer before entering into negotiations.

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