Mutual Indemnification in Leases

Why Can’t I Have What the Landlord Gets?
Submitted by Cameron A. Grant

I recently spoke to a group of commercial real estate brokers about the legal aspects of the leasing business. One question that garnered significant attention related to indemnification provisions in lease agreements. These brokers represent both landlords and tenants in lease deals and routinely run into a negotiating hurdle about indemnification. Landlords often demand that the tenant indemnify them against a host of potential problems but are reluctant to give tenants a similar level of protection. The brokers reported difficulty in bringing the two sides together over this issue. One broker said that a major lease negotiation broke down over this issue alone. This is an avoidable problem. If the parties understand the differing degrees of control and exposure perhaps indemnification will not pose such a challenge to these negotiations.

What is “indemnification“? – a party’s agreement to pay the liability, and in some cases, the defense costs and damages, of the other party if a claim is asserted by a third party.

In a lease, a landlord permits an unrelated party, the tenant, to do business in and have control over space owned by the landlord. On the one hand, because the landlord owns the space, if the tenant or its property is damaged, the landlord is likely to be sued. On the other hand, landlords often have little control over a building, piece of property or interior of a retail store after it is leased to the tenant. They also want to avoid the cost of insuring for accidents within the leased space. Consequently, most standard landlord form leases shift to the tenant responsibility for losses and accidents in the leased space.

In my experience, almost universally, a tenant who reads the landlord indemnification provisions of a lease asks for the landlord to provide an identical indemnification to the tenant. That may seem fair on the surface but when you consider the different levels of control and exposure, landlords may have a point. Consider a restaurant business. The tenant (restaurateur) invites employees, customers and suppliers into their space, serves them food and drink and profits from their activity within the restaurant. The restaurateur is also always on-site, either personally or through a manager or other employees. The landlord, by comparison, is rarely at the building. While they may have a property manager, that manager is not on-site regularly. Further, the portion of the property under the landlord’s control is generally limited to a parking lot, perhaps some interior hallways or common restrooms. In this situation, who should reasonably have more responsibility for controlling activities on-site? Asking a landlord to have the same degree of control and responsibility in this situation may, in fact, not be the right result.

The appropriateness of indemnification provisions in a lease agreement will depend upon the specific facts of the relationship and a solid understanding of the relative positions of control and risk should help a landlords, tenants, brokers and attorneys work through this often divisive issue.