How to Indemnify Yourself Against Tenant's Damage

Q: How can I make my retail tenants responsible for damages that I might suffer as a result of their—or their employees’ or contractors’—actions?

A: Tenants have the potential to cause damage to your center by hiring contractors who botch improvements to their space, using professionals who fail to correct problems like plumbing leaks or electrical issues, and employing workers who are careless. And high-risk tenants, such as liquor stores and gun stores, increase the chances of an accident or property damage that you could be held liable for because of the dangerous nature of their businesses.

A carefully drafted indemnity clause can save the day when you’re facing expensive repairs or personal injuries necessitated by your tenant’s behavior or business. Here’s what you need to know about indemnifying yourself against your tenant’s damage:

Carefully Draft Indemnity Clause

An indemnity clause is a provision in your lease with the tenant by which you can make it financially responsible for damage—even if the damage wasn’t caused directly by the tenant. For example, suppose the property your tenant leases is damaged as a result of a plumber’s negligence. If your lease contains an indemnification clause, financial responsibility will be imposed on the tenant, regardless of the fact that the damaged property ultimately belongs to you. And the courts in many states are likely to support imposing liability on the tenant for things like this.

Typically, tenants have insurance that covers situations like these. But, in the case of high-risk businesses, consider requiring them to go above and beyond the standard insurance that most tenants must get. For steps you can take to negotiate insurance procurement clauses with high-risk tenants, see “How to Avoid Extra Liability Posed by High-Risk Tenant,” available in our online archives. And look under Model Tools on our homepage for the Model Lease Clause: Require High-Risk Tenant to Get Comprehensive Insurance, which you can adapt and use in your leases.

Understand Scope of Clause

But remember that there are certain types of damages that courts generally don’t allow an owner to pass off, no matter what the lease says. For example, almost all states prohibit a commercial property owner from protecting itself from liability for its own gross negligence or intentional misconduct. The case law or statutes in some states go even further to limit an owner’s chances of avoiding liability by denying commercial property owners the right contractually to force tenants to pay for any owner-caused property damage. There is another type of damage that the courts in most states would probably refuse to uphold: an indemnity clause that makes a tenant responsible for any personal injury caused by the owner—for example, a shopper who is injured in a tenant’s space because of the owner’s maintenance team’s negligence.

Use Additional Indemnity Options Besides the language in the lease, there are other ways you can secure indemnity rights. Your attorney can ask the tenant’s counsel to include you as a named insured, instead of just an additional insured, on its insurance policies. Then your risk is clearly covered because it’s an insured risk in the policy. The concept is that the tenant should bear the risk of anything that happens on or about its premises, even if the loss is caused by the owner. Most tenants may object to making you a named insured on their policies. As with all commercial leasing negotiations, in the end, it all comes down to bargaining power.