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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