Commercial Leases: What in the World is an Indemnity Clause?

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commercial leaseWhether you’re a commercial landlord or tenant, you may be confused. As you read through the lease agreement, you find language that’s somewhat foreign to you. Understandably, you can’t help but wonder. What in the world is an indemnity clause?

For the most part, the indemnity clause almost always pairs with a promise to defend. Feel even more clueless? Consider another term of art commonly appearing in commercial lease agreements. You may also note reference to the landlord being held harmless.

So, what does all this mean exactly? First, let’s start off with a basic reminder. Unlike residential leases, commercial lease agreements generally follow no standardized rules. This allows the landlord and tenant to negotiate and commit to an assortment of terms.

You may note an indemnification clause in the section of the lease that deals with what happens if there is an issue of personal injury or property damage on the leased property. However, the language that comes both before and after is also critical.

Consider this scenario. You are the property owner of a diner located on a busy street. All things considered, your building is ideally located and has a large parking lot in the back of the restaurant. As part of your lease agreement with the tenants who rent the premises, you both agree that the tenant takes on responsibility for removing snow and ice.

Unfortunately, a couple of days after a bad snowstorm, a diner patron slips and falls as she is walking into the eatery. You are shocked when you receive a letter from an attorney asserting a personal injury claim. Can you be held liable?

What the Indemnity Clause Means

If you’ve consulted with an experienced real estate attorney, there’s a good chance that you are protected. For starters, the tenant will most likely have waived rights to pursue a claim against you. That said, exceptions would be made if the injuries or damages were due to gross negligence or willful misconduct by the landlord.

In this type of case, you would hand over the claim to your insurance company. Ultimately, however, it would be up to the tenant’s insurance carrier to defend the prospective lawsuit and provide indemnification. In plain language, this means that the tenant would take be obligated to pay for the losses.

Truth be told, indemnity clauses can cause some battles between landlord and tenant insurance companies.  In American States Ins. Co. v. Philadelphia Ins. Co., the duty to defend and indemnify became extremely confusing.

In that matter, the part owner of a fitness studio fell on steps his company leased from a shopping mall. According to the lease agreement, the stairway was part of the common area and therefore, the landlord’s responsibility.

Meanwhile, the lease agreement called for the tenant to maintain liability insurance and name the landlord as an additional insured. When the injury victim filed a lawsuit against the landlord, the claim went to the landlord’s insurance company. Later, that carrier brought the tenant’s insurance company into the suit – stating their duty to defend and indemnify.

In the end, the court determined that use of the stairway proved critical to the tenant’s use of the premises. Therefore, the law required that the tenant’s insurance company  provide coverage to the landlord.

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Commercial lease agreements potentially provide complications  for both landlords and tenants. Contact the Law Offices of Lawrence M. Centanni if you are executing a new lease or have questions concerning an existing one. We look forward to helping you.

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