Crafting Enforceable Indemnity Clauses for Commercial Leases


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By Larry M. Centanni, Esq.

When it comes to indemnification, or “hold harmless,” clauses in New Jersey commercial leases, there can be some real challenges. Oftentimes, parties to a commercial lease will make an effort to interpret an indemnification clause to their benefit should a legal issue arise.

Properly constructing an indemnification clause ahead of time for your commercial leases can prevent undesirable legal outcomes for both parties to a commercial lease. Here’s a look at what to know when it comes to indemnification clauses in commercial leases in New Jersey.

What is an Indemnification Clause?

The purpose of an indemnification clause is to protect one party of a commercial contract from liability issues created by the negligence or actions of the other contracted party. In New Jersey, commercial lease agreements, unlike residential leases, follow no standardized set of rules. The reason for this is to allow more flexibility for the negotiation of terms and the lease commitment for commercial landlords and leaseholders. After all, a commercial lease generally needs to be more flexible than a standard residential lease.

Within the indemnification clause of a commercial lease, the landlord or their legal representative will outline what happens if there is a personal injury on the property or if property damage occurs. See more about indemnity clauses in commercial leases in our previous blog, “Commercial Leases: What in the World is an Indemnity Clause.”

Indemnification Legal Battles

A weak indemnity clause can lead to legal battles and this has happened. For example, in American States Insurance Company V. Philadelphia Insurance Company, the defense and indemnification of one contracted party became incredibly convoluted.

In that case, the part owner of a fitness studio on the property fell on the steps that his business rented from a shopping mall. Per the commercial lease agreement, the stairs were considered part of the common area, and, thus, were the landlord’s responsibility.

What made the matter so complicated was that in the lease agreement, the landlord required the tenant to carry liability insurance. The landlord was to be named as an additional insured in the liability insurance per the commercial lease. When the injured party filed a lawsuit against the landlord, the claim went to the landlord’s insurance carrier. The landlord’s carrier then brought the tenant’s insurance company into the suit stating they had a duty to defend and indemnify the landlord per the commercial lease agreement through the indemnification clause.

The conclusion in the case was that the court determined the stairway was critical to the tenant’s use of the property. Thus, the law required the tenant’s insurance company to provide coverage for the landlord in the case.

Poorly Constructed Clauses Lead to Poor Outcomes

While the aforementioned case worked out for the landlord, in the end, imagine the stress and anguish it created as the case moved through the legal system. There have been more recent cases in New Jersey where indemnification clauses were not enforceable due to poorly worded language or weaknesses in adhering to other aspects of the commercial lease involved.

One example is the 2003 decision of the case Azurak V. Corporate Property Investors, the Supreme Court of New Jersey. In that case, it was ultimately determined that an indemnification clause was not enforceable due to imprecise language used in the original lease agreement. The plaintiff, Mary Azurak, was injured when she slipped on a slick substance and fell in a mall owned by Corporate Property Investors (CPI).

It was argued by CPI that they were not liable. Instead, they placed the blame on their janitorial firm, Planned Building Services (PBS).

After reviewing the indemnity clause between CPI and PBS, the court ruled the verbiage of the contract was so vague that it failed to remove liability for negligence from CPI. In other words, liability for the accident was assigned to both CPI and PBS in this case. It was determined that the liability of PBS did not negate the liability of CPI. The vague language of the commercial rental agreement only included the liability of PBS and failed to indemnify CPI.

Crafting a Defensible Indemnification Clause

There are three separate technical terms that are important to creating a properly worded indemnification clause that can be defended well in court. Those three terms are to indemnify, hold harmless, and defend. Each term stands on its own and must be included in the indemnification clause, according to the American Bar Association.

Indemnification guarantees a third-party claim against your counterparty. A proper indemnification clause will require that the landlord is indemnified for any third-party claims against the renter of your commercial property. This means the party you are renting to will be fully liable for any damages as you are indemnified for any loss. This can be accomplished with specific language such as being named a covered additional party in an insurance policy required by the renter in your commercial rental agreement.

To hold harmless means that one party in the commercial rental agreement agrees not to seek damages from the other for their own losses. A hold harmless clause should be included in the language of every commercial rental agreement for any acts of negligence. For example, if the terms of a rental agreement require a renter to remove snow from stairs, ramps, and walkways, and someone slips and falls due to their failure to follow through, you’d be protected by your hold harmless clause.

An agreement to defend should also be included in the language. This part of the negotiated terms of the commercial rental agreement means that the renter would be the obligated party to assume the burden, including legal costs, of defending you as the landlord in any case involving negligence or injury on the property. It is this defense agreement that covers you as the landlord in the event something goes wrong that is the tenant’s responsibility and they defend you as well as themselves in the event of a lawsuit.

Seek Professional Assistance

To best protect yourself and your commercial property, seek out the assistance of an experienced commercial property attorney. They can review your commercial lease agreements to ensure that all parts of a proper indemnification clause are present and that the language is clear and defensible should the worst occur.

For assistance with your commercial lease agreements and contracts, contact the Law Office of Larry M. Centanni or call us directly at (908) 351-0028 now to schedule a free initial consultation.

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