Indemnification is one of the most important clauses in a commercial lease. And often one of the most overlooked clauses, too, by tenants, with the excitement of signing a new lease to a new commercial space. Let’s break down what it means and why it matters.
What Is Indemnification?
Indemnification is a legal concept that shifts a risk from one party to another. In a commercial lease, this usually means a clause that says something like:
“The tenant agrees to “indemnify” (i.e., protect and compensate) the landlord if the landlord suffers damages because of something the tenant did or failed to do.”
The lease itself will likely use far more technical terms. But in its simplest forms, it usually means that if someone gets hurt or property gets damaged because of your actions (or your employees, customers, vendors, etc.), you agree to cover the costs.
This could include personal injury claims on the premises, damage to the building caused by your business operations, or other types of lawsuits resulting from a tenant’s negligence.
Why Does Indemnification Matter?
- Risk Allocation. Indemnification defines who pays if something goes wrong. Without it, you could be exposed to unexpected legal or financial liability. The landlord typically requires its inclusion in the lease to avoid being held responsible for something beyond their control.
- Potential Financial Exposure. Indemnity clauses can be very broad, potentially making you liable for legal costs, damages, or settlements even in cases where the issue wasn’t entirely one party’s fault.
- Insurance Implications. Most leases require you to carry commercial general liability insurance (and it’s a good idea no matter what). The indemnity clause often aligns with your coverage. However, if your indemnity obligations go beyond your insurance limits, you or your business could be personally responsible for the difference.
Things to Watch Out For. Tenants should be aware that this seemingly standard contract term can be anything but. For example, some leases may ask tenants to indemnify landlords under any circumstance, even if the landlord is the party at fault. Tenants should beware of vague or overly broad language like “any and all claims related to the premises.” And if overly broad language is identified, they can negotiate for more favorable indemnity terms as part of the leasing process.
Final Thoughts
Indemnification clauses in commercial leases seem standard, but are not boilerplate contract terms. They can carry real legal and financial weight. Before signing your commercial lease, make sure you fully understand the extent of any risks you are taking on and negotiate reasonable indemnification terms.
The attorneys at Way Law can help make these often complex clauses easy for you to understand. And more importantly, help make sure your indemnity obligations are fair for you and your business!