In the Spotlight: Beware of 'Lite' Indemnification

Concerns and Solutions

Ingredients missing from the sample clause cluster around the following points: 1) the scope of substantive protection, 2) procedural protection, and 3) temporal protection. As demonstrated below, some of these concerns can be addressed by adding just a pinch of extra language. Other points require lengthier wording, but are well worth the effort and space.

Scope

Most indemnity clauses include a long list of bad things against which the landlord is intended to be protected. Curiously, however, many such clauses literally address only liquidated, definitive claims. Landlords that have been obliged to investigate allegations and to address threatened claims feel the pinch of the expense involved just as much as if a summons and complaint had been served. These costs are certainly just as significant when the matter involves an indirect claim by a third party as when the claim is made directly against the landlord. Consequently, do not overlook the need to include the following phrase where indicated by the single asterisk in the sample clause:

any and all actual or threatened (and whether direct or indirect) claims, allegations,

Another scope limitation that inexplicably appears in many an indemnity clause centers on the popularity of negligence as a basis for justifying protection. In an age when vandalism ' and unfortunately even much worse conduct ' is rampant, protection against criminal behavior, civil torts, and regulatory noncompliance is also appropriate ' and doubtless is expected by landlords (even if not assured by commonly used indemnity language). The sample clause should be enhanced at the set of two asterisks by the inclusion of the following language:

or other wrongful act or omission, or event attributable to (and with respect to all of the foregoing, including without limitation any act, omission or event for which strict liability is imposed),

Last (at least for purposes of this article), it is essential to consider the interplay between a tenant's indemnity obligation and the obligation that may be imposed upon a landlord in a reciprocal or other companion clause. Far too often, these clauses are prepared on a simple reciprocal basis. The resulting circularity leaves it difficult, if not impossible, to predict how the obligations will be implemented and enforced. Although differing treatments can readily be conceived to allocate the risk on a less balanced fashion if desired (and if one's bargaining power permits), an even-handed approach to eliminate uncertainty in this regard can be achieved by simply replacing the phrase 'as a result of' ' where indicated by the third set of asterisks in the sample clause ' with the following phrase (which is, incidentally, intentionally not wholly reciprocal):

in each case except to the extent (but only except to the extent) resulting from the negligence or other wrongful act or omission of, or event attributable to (and with respect to all of the foregoing, including without limitation any act, omission or event for which strict liability is imposed), of Landlord.

Procedural Protection

What is there not to like about the defense protection offered by the sample clause? Potentially plenty, unless the landlord's answer to each of the following questions is an unqualified 'yes': a) Will the landlord be happy with counsel selected by the tenant; b) Will the landlord be happy being left uninformed about the status and strategy of the matter; and c) will the landlord be happy allowing the tenant to control the question of whether to settle and the terms of a settlement? Most landlords would answer 'no' to all of the above. To address these concerns in advance, the sample indemnification clause should establish procedural rights and obligations. Additional language that illustrates ingredients of this nature is set out in the refined sample clause that appears below.

Temporal Protection

Landlords expect certain protection to remain in effect after the end of the leasehold term. An all too common pitfall can be encountered in the form of qualifying phrases that somehow get blended into leases, such as 'during the term … ' In any event, why take a chance? Express the survival intention with certainty, such as by adding the following at the end of the indemnification clause:

Notwithstanding anything provided in this lease to the contrary, the rights and obligations created in this indemnification clause shall survive the end of the term of the lease governed by this Agreement (regardless of the time at which or the manner in which such term ends).

Conclusion

Indemnification clauses are by their nature dense. Do not settle for a diluted version. When creating or reviewing these clauses, the essence needed is often what has yet to be added. Remember: The proof of the pudding is in the eating.

Randolph M. Perkins is a partner practicing in the Lake Forest office of Schiff Hardin LLP. He is a member of the firm's Real Estate Department and also its Corporate and Securities Department. Consult with your own legal counsel prior to using all or any part of the sample clauses set out in this article. Differing rules of interpretation and construction in various jurisdictions may affect the efficacy of these clauses. All such clauses are included only to illustrate the commentary set forth; such inclusion is not intended to constitute, nor constitutes, the provision of legal advice in any jurisdiction.

Some commercial landlords consider indemnification clauses in leases to constitute mere 'legal boilerplate' that do not merit attention from a business perspective. Some lawyers, feeling pressure to minimize the length of lease documents, may seize upon this clause as an opportunity to save space. As a result, it is not uncommon to encounter abbreviated indemnification clauses. At first glance, the language appears suitable. However, when put to the test, these 'lite' clauses often leave landlords unsatisfied. This article demonstrates the value of 'kicking it up a notch' by including ingredients called for in the recipe but often left out of the mix.

Sample 'Lite' Clause

Few landlords are willing to forego indemnity protection from tenants. However, when presented with the following clause, many landlords ' and perhaps some attorneys ' would feel comfortable.

Tenant shall indemnify and hold Landlord harmless against, and defend Landlord from, * all obligations, actions, assessments, losses, liabilities, damages (including without limitation special, consequential, exemplary, punitive and similar damages), costs and expenses paid or incurred, including without limitation penalties, interest on any amount payable to a third party as a result of the foregoing and any legal or other expenses reasonably incurred in defending any claims or actions, suffered or incurred by Landlord as a result of the negligence ** of Tenant or Tenant's employees, agents and invitees. *** ****

This seems like pretty comprehensive protection ' especially given the length of the sentence. Not so. It leaves unanswered many questions to which landlords want answers when the clause becomes operative. For illustrative purposes, the sample clause above has been marked with asterisks to indicate spots that are relevant to these questions. The same clause, refined by the changes discussed in the following section, appears in the box to the right.

Concerns and Solutions

Ingredients missing from the sample clause cluster around the following points: 1) the scope of substantive protection, 2) procedural protection, and 3) temporal protection. As demonstrated below, some of these concerns can be addressed by adding just a pinch of extra language. Other points require lengthier wording, but are well worth the effort and space.

Scope

Most indemnity clauses include a long list of bad things against which the landlord is intended to be protected. Curiously, however, many such clauses literally address only liquidated, definitive claims. Landlords that have been obliged to investigate allegations and to address threatened claims feel the pinch of the expense involved just as much as if a summons and complaint had been served. These costs are certainly just as significant when the matter involves an indirect claim by a third party as when the claim is made directly against the landlord. Consequently, do not overlook the need to include the following phrase where indicated by the single asterisk in the sample clause:

any and all actual or threatened (and whether direct or indirect) claims, allegations,

Another scope limitation that inexplicably appears in many an indemnity clause centers on the popularity of negligence as a basis for justifying protection. In an age when vandalism ' and unfortunately even much worse conduct ' is rampant, protection against criminal behavior, civil torts, and regulatory noncompliance is also appropriate ' and doubtless is expected by landlords (even if not assured by commonly used indemnity language). The sample clause should be enhanced at the set of two asterisks by the inclusion of the following language:

or other wrongful act or omission, or event attributable to (and with respect to all of the foregoing, including without limitation any act, omission or event for which strict liability is imposed),

Last (at least for purposes of this article), it is essential to consider the interplay between a tenant's indemnity obligation and the obligation that may be imposed upon a landlord in a reciprocal or other companion clause. Far too often, these clauses are prepared on a simple reciprocal basis. The resulting circularity leaves it difficult, if not impossible, to predict how the obligations will be implemented and enforced. Although differing treatments can readily be conceived to allocate the risk on a less balanced fashion if desired (and if one's bargaining power permits), an even-handed approach to eliminate uncertainty in this regard can be achieved by simply replacing the phrase 'as a result of' ' where indicated by the third set of asterisks in the sample clause ' with the following phrase (which is, incidentally, intentionally not wholly reciprocal):

in each case except to the extent (but only except to the extent) resulting from the negligence or other wrongful act or omission of, or event attributable to (and with respect to all of the foregoing, including without limitation any act, omission or event for which strict liability is imposed), of Landlord.

Procedural Protection

What is there not to like about the defense protection offered by the sample clause? Potentially plenty, unless the landlord's answer to each of the following questions is an unqualified 'yes': a) Will the landlord be happy with counsel selected by the tenant; b) Will the landlord be happy being left uninformed about the status and strategy of the matter; and c) will the landlord be happy allowing the tenant to control the question of whether to settle and the terms of a settlement? Most landlords would answer 'no' to all of the above. To address these concerns in advance, the sample indemnification clause should establish procedural rights and obligations. Additional language that illustrates ingredients of this nature is set out in the refined sample clause that appears below.

Temporal Protection

Landlords expect certain protection to remain in effect after the end of the leasehold term. An all too common pitfall can be encountered in the form of qualifying phrases that somehow get blended into leases, such as 'during the term … ' In any event, why take a chance? Express the survival intention with certainty, such as by adding the following at the end of the indemnification clause:

Notwithstanding anything provided in this lease to the contrary, the rights and obligations created in this indemnification clause shall survive the end of the term of the lease governed by this Agreement (regardless of the time at which or the manner in which such term ends).

Conclusion

Indemnification clauses are by their nature dense. Do not settle for a diluted version. When creating or reviewing these clauses, the essence needed is often what has yet to be added. Remember: The proof of the pudding is in the eating.

Randolph M. Perkins is a partner practicing in the Lake Forest office of Schiff Hardin LLP. He is a member of the firm's Real Estate Department and also its Corporate and Securities Department. Consult with your own legal counsel prior to using all or any part of the sample clauses set out in this article. Differing rules of interpretation and construction in various jurisdictions may affect the efficacy of these clauses. All such clauses are included only to illustrate the commentary set forth; such inclusion is not intended to constitute, nor constitutes, the provision of legal advice in any jurisdiction.