The Dark Corners of the Commercial Lease: Part Three

The following was adapted from a lunch & learn presentation at Sperry Van Ness | RICORE Investment Management, Inc in Cincinnati, Ohio. This is part three in a four-part series. 

Demystifying the Commercial Lease: Part Three

A typical commercial lease is a comprehensive document that may be anywhere from 20 to 60 pages long. (Often with exhibits these things can be huge! So, reviewing new leases can be a real headache for an agent trying to sell or property manager taking on the management of a new multi-tenant property or shopping center.) When paging through a lease many provisions can seem irrelevant, extraneous, unimportant or rarely used. The fact is that every lease provision is drafted to address a specific event, need or situation that a landlord or tenant may face. Today, I was asked to address some of the more ‘legalistic’ provisions in the commercial lease in an attempt to try to ‘demystify’ them for you.

Also be sure to read part one of this series on Subordination, Non-Disturbance and Attornment Agreements and ‘SNDA Agreements’, and part two on Tenant Estoppel Certificates.

III. Indemnification.

Since a tenant of a commercial lease has both possession and control of the premises owned by the landlord (and the landlord does not), a landlord will generally require the tenant to indemnify the landlord in connection with any incident or event occurring on the premises or arising from the tenant’s occupancy or use of the premises. On the one hand, because the landlord is the owner of the space, if the tenant or its property is damaged, or if a customer is injured in the space, the landlord is likely to be sued for the damage or injury. On the other hand, frequently, landlords have little practical control over a parcel of property or interior store space after it is leased to a tenant. Further, landlords also do not wish to bear the cost of insuring for accidents in the tenant’s leased space.

A typical indemnification provision from a pro-landlord lease is as follows:

Indemnity. Tenant agrees at all times to indemnify, defend and save harmless Landlord and its members, officers, employees, agents, contractors, successors and assigns from and against any and all claims, actions, damages, liabilities and expenses, including, but not limited to, attorneys’ and other professional fees and expenses, in connection with loss of life, personal injury and/or damage to property occurring on the Premises or arising from the occupancy or use by Tenant of the Premises, or arising from any breach or default in the performance of any obligation on Tenant’s part to be performed under this Lease, or resulting from or arising out of the act or omission of Tenant, its agents, employees or invitees.

An indemnity provision is a contractual obligation of the tenant to pay for something (claims, damages, liabilities or expenses…) and it is separate and apart from other contractual obligations and damages under the lease or any other agreement. Therefore, an indemnity obligation by the tenant can be of great benefit to the landlord, since the landlord does not have to prove that its damages or expenses flowed directly from the tenant’s default under the lease in a court of law in order to get an order by the tenant to pay to the landlord.

A pro-landlord indemnity provision will seek to cover not only claims arising from events or incidents occurring within the premises but also those of invitees, such as customers, suppliers, employees and vendors of the tenant, occurring outside of the tenant’s premises, for instance, on the sidewalk in front of an office or storefront or in the parking lot of an office or shopping center. A landlord believes the tenant should be responsible for such claims since these persons are coming to the tenant’s premises for the purposes of conducting business with the tenant. However, if the area is a common area such as a sidewalk or parking lot under the landlord’s control and a business invitee slips and falls on accumulated ice, the landlord is likely responsible for some or all of the claim. Further, a tenant can be responsible for the negligent or intentional acts of its employees, agents or invitees under the indemnity clause. [Keywords indicating coverage for negligence: claims… arising from the acts or omissions of the tenant, its agents, employees or invitees… ]. Lastly, a pro-landlord indemnity provision will protect the landlord from liabilities, damages and expenses arising from the tenant’s breach or default under the lease.

Ohio Law – Premises Liability:

“Occupation [or] control… is necessary as [a] basis for liability of such party for personal injuries resulting from the condition of such premises.” See Cooper v. Rose, 151 Ohio St. 316 (1949).

“One having neither occupation nor control of premises is ordinarily under no legal duty to an invitee of another with respect to the condition or use of those premises.” Brown v. Cleveland Baseball Co., 158 Ohio St. 1 (1952). Shump v. First Continental-Robinwood Associates, 71 Ohio St. 3d 414 (1994) (citing each of the above cases with approval).

Protections for Landlord from Claims (Order of Recourse):

1. Tenant – obligations under lease, includes an indemnity obligation to the landlord (solvency of the tenant and its business);

2. Tenant’s Insurance – the tenant’s coverage should be ‘primary;’

3. Tenant’s Guarantors – always require (or ask for) guarantors;

4. Landlord’s Insurance – the landlord’s coverage should be ‘secondary’ to the tenant’s which is primary; and

5. The landlord’s limitation of liability in the lease itself (liability of the landlord shall be limited to the landlord’s interests in the property and any judgments shall be satisfied solely out of the proceeds of sale of the landlord’s interest in the property. No personal judgment shall be taken against the landlord or its partners, shareholders, directors, officers…).

In summary, an indemnity clause is an important ‘catch-all’ protection for the landlord, providing protection and an obligation of the tenant to pay for all sorts of claims arising from the tenant’s use and occupancy of the premises, including the negligence [acts or omissions] of the tenant, its agents, employees or invitees, as well as for damages, liabilities and expenses arising from breach or default in performance of the tenant’s obligations under the lease.

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