Negotiating Enforceable Indemnification Provision

Q: I’m negotiating a lease with a prospective tenant for my shopping center. I’ve been sued several times in the past few years for personal injuries sustained at the center. I’d like to avoid any further lawsuits. Can I include provisions in the lease that would relieve me from liability for an accident resulting from conditions caused by me, not the tenant, at the center?

A: Whether this specific kind of lease provision—an “indemnification provision” is fair or enforceable will be determined by two things: (1) the type negligence that causes the accident; and (2) state law, which varies on this issue from state to state.

            A broad indemnification provision—which permits a party who has been compelled to pay for the wrong of another to recover from the wrongdoer the damages the party paid to the injured party—is allowable under some circumstances. Courts have held that a commercial lease negotiated between “two sophisticated parties” who include a broad indemnification provision, coupled with an insurance procurement requirement is enforceable. So, if you and the tenant negotiate an indemnification agreement whereby you use insurance to allocate the risk of liability to third parties (for example, a shopper who slips and falls on the premises) between yourselves, it won’t prohibit indemnity. Or, you could agree to pay for damages beyond the tenant’s insurance policy coverage.

            If the purpose of the indemnity clause, however, is to exempt you from liability for three types of negligence (gross negligence, intentional misconduct, and personal injury) caused by you and put the blame on the tenant, then a court most likely won’t enforce the indemnity clause. And you can’t circumvent this merely by inserting a lease provision requiring the tenant to obtain insurance that would pay for an accident. That was the controversy in a recent New York case. There, a rider to the lease was unenforceable because it attempted to relieve the owner of its responsibility for damages for a personal injury caused as a result of its own negligence. This type of relief also wasn’t permissible under state law. The owner also tried unsuccessfully to rely on the lease’s insurance requirement.

            In that case, a furniture store tenant’s employee tripped over a raised concrete curb and fell into the loading dock area at a retail center. The employee sued the owner and the tenant alleging that they were negligent in, among other things, causing, creating, or permitting a dangerous condition to exist by allowing a raised concrete curb to project beyond the edge of the loading area, failing to paint or highlight the raised concrete curb, failing to repair and/or replace a railing around the loading area after having actual notice that it was missing, failing to install a chain at the end of the loading area, failing to provide safe walking areas, and failing to post warning signs.

            In a separate claim, the owner sued the tenant, demanding that it indemnify the owner. The tenant asked a court for a judgment in its favor dismissing the suit on the grounds that the contractual indemnification provisions of the lease weren’t legally enforceable and that it couldn’t be found liable because the responsibility for construction, maintenance, and repair of the alleged defective conditions of the curb and railings remained solely with the owner under the lease terms. According to the tenant, the owner was responsible for repairing the railing and its posts and had done so “many times prior to that incident.” The tenant also testified that the curb and railing posts were never painted and that signs were never posted in that area.

            But the owner contended that the indemnification clause was enforceable when read together with the insurance procurement clause of the lease. That is, because the tenant was required to have insurance that covered injuries that happened on the premises, the owner wouldn’t be financially responsible for them. The owner’s argument relied on a portion of the lease where the tenant agreed “to carry all necessary insurance in connection with his business to save the Landlord harmless from any damages whatsoever and the Tenant specifically agrees to take out, maintain, and pay for public liability insurance protecting the Landlord as well as himself, to the extent of $1,000,000 single limit.” Under the lease, if the tenant failed to obtain such policies, the owner could obtain them and add the premium cost to the rent as additional rent.

            The court disagreed with the owner’s assertion that under any circumstances the tenant’s insurance policy would excuse the owner from liability or having to pay for any damages. On the one hand, the court stated that, under New York law, “a commercial lease negotiated between two sophisticated parties who include a broad indemnification provision, coupled with an insurance procurement requirement is enforceable.” Thus, where an owner and tenant freely enter into an indemnification agreement whereby they use insurance to allocate the risk of liability to third parties between themselves, indemnity is allowed, the court clarified.

            “If the purpose of the indemnity clause, however, is to exempt the owner from liability to the victim for the owner’s own negligence, then the indemnity clause violates the law,” noted the court. Moreover, an owner couldn’t circumvent the law merely by inserting a lease provision requiring the tenant to obtain insurance, it said.

            Here, the indemnification portion of the lease was unenforceable because it attempted to relieve the owner of its responsibility for damages caused as a result of its own negligence that led to one of the three types of negligence not allowed under an indemnification provision (a personal injury), the court determined. And, under that circumstance, whether or not the tenant was required to or actually did have insurance was irrelevant [Miller v. Carpentier Properties Corp., December 2012]. (For a similar case, see “Don’t Try to Use Insurance Clause to Evade Obligation to Indemnify Tenant,” in the March 2010 Insider, available on our Web site.)