Indemnification Clauses: Think about it now or regret it later

Indemnification clauses may not appear to be a typical topic for discussion on a real estate law blog, but it's a provision that we would all benefit from reviewing once in a while. Indemnification clauses are frequently found in lease agreements, purchase agreements and other contracts relating to commercial real property.

Many landlords, tenants, property managers and service vendors pay little attention to the indemnity provision in their contracts beyond confirming that such a provision is included.  However, it is not a one size fits all provision, or shouldn't be.

Parties to an agreement include indemnification provisions when there is potential for either party to be sued on matters for which the other party should be held legal responsible.  If a tenant is storing hazardous materials on the premises, the landlord will want ironclad indemnification from the tenant to hold the landlord harmless if the EPA comes calling.

Indemnification provisions can be one paragraph to several pages long. With some exceptions, the length of a decent indemnification provision is somewhere in the middle of those two extremes. Here are some questions to answer when adequacy of the indemnity for a particular contract:

*        What is the level of risk and how it can be allocated between the parties? Some provisions should be mutual or in some instances the risk is only on one side. The bigger the exposure then the more comprehensive the provision should be.

*    What actions or inactions should be subject to indemnification?  Many contracts include generic provisions that are too vague about what is covered and some are over broad. Depending on which side of the equation a party is on, there may be grounds to argue for an expansion or a narrowing of the matters covered by indemnification.

*    How long should it last? Some risk exposures last beyond the contract. If a property owner contaminated the ground water and then sells the property, the new owner would want recourse against the prior owner.  The party with the most exposure, such as the seller of real estate, will want to limit the indemnity as much as possible while the opposing party will want to extend the indemnity.  In more detailed indemnification provisions, indemnified issues will be separated into categories, some of which will survive indefinitely, while others will be subject to shorter time frames, such as a period of years or months or the expiration of the applicable statute of limitations.

*         Who does it cover? ...just the parties or their officers, directors, managers, employees, affiliates, agents, successors and assigns?

*         Who controls the litigation? The party being asked to provide the indemnity may want to control the litigation to ensure it is being handled appropriately. However, no party, even the indemnified party, will want litigation to be settled in any manner where the party not controlling the litigation is being committed to some action or inaction without its consent.  If the indemnifying party is not choosing the lawyer and controlling the litigation, it will still want to place limits on how many attorneys are retained for the action, etc. to ensure that it is not gouged on the cost of the legal defense.  The indemnifying party will also want to ensure it is promptly notified of the matter requiring indemnification so that it does not lose any defense options due to lapses of time.

*         What about other limitations on liability?  If a party suffering the loss or damage is also taking a tax write off or receiving proceeds from an insurance claim for that loss or damage, should the party be able to double dip and also claim full indemnity from the other party? Also, some indemnification provisions (most typically seen in purchase agreements) may contain a cap on the total exposure or a threshold to be reached before any claim may be made.  Including a threshold, aka a "basket," prevents a party from being nickel and dimed over small matters. In some instances the basket will be a "tipping basket" in which the indemnifying party will be obligated back to the first dollar once the threshold is reached. If there is a cap, some situations may fall outside of the cap. Typically indemnification obligations not subject to a cap are third party actions or fraud or intentional misrepresentation on the part of the indemnifying party.

As you can see, if these issues are negotiated into any indemnification provision, it will certainly require more than a couple of sentences.  While many want to keep their agreements as simple as possible and curse the lawyers who want to 'overcomplicate' matters, if something goes wrong later, a properly negotiated indemnity may be exactly what they needed.   


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