Indemnities in property leases - what tenants need to know

An indemnity is a promise or guarantee to compensate someone for loss or damage in specified circumstances. In commercial and retail leases, indemnity clauses are common, requiring tenants to cover losses that may arise from their occupation or use of the premises.

It is important for tenants to understand the implications of indemnity clauses before signing a lease, as these clauses can impact their financial and legal obligations.

What indemnities typically appear in leases?

In property leases, tenants are usually required to indemnify the landlord for any claims, losses, costs, or expenses the landlord incurs or becomes liable for in connection with:

• damage to property and premises caused by the tenant or their agents;

• loss, injury, or death suffered by someone else on the premises;

• default by the tenant under the lease, such as costs arising from failing to maintain the property or pay rent; and

• the tenant’s use or occupation of the premises.

Why are indemnities important for tenants?

Indemnities allocate risk between parties.

For landlords, they provide certainty that the tenant is responsible for certain risks. If the agreed event occurs, the landlord knows they will be compensated.

For tenants, they define the scope of the tenant’s liability and can help the tenant focus on what and how to manage its risks.

When can indemnities put tenants at a disadvantage?

While indemnities help manage risks, they can also put tenants at a disadvantage.

1. Liability for matters beyond control: Broad or improperly drafted indemnities may mean tenants are held financially responsible for situations beyond their control.
   
   
2. No requirement to mitigate losses: Tenants may have to compensate landlords even if the landlord hasn’t taken steps to reduce or avoid the damage.
   
   
3. Potential loss of insurance coverage: In some circumstances, an indemnity can undermine a tenant’s insurance policy and result in the insurer refusing to pay out a claim.

Before agreeing to an indemnity, what should tenants consider?

Indemnity clauses should be reviewed as part of the lease negotiation process. Tenants should generally consider:

1. what risk is being managed and is it appropriately scoped out or defined;

2. is the indemnity necessary or what other remedies are reasonably available to the landlord to manage the identified risk if you do not agree to the indemnity;

3. what is the duration of the indemnity – is it unlimited in time and scope;

4. how will the indemnity affect the overall value or flexibility of the lease, particularly if you plan to assign or sublease the property;

5. how does the indemnity affect your own insurance policy and could it impact coverage or increase premiums? It may be useful for a tenant to have its insurer review the indemnity to confirm whether it is covered under the policy;

6. does the indemnity exclude any damage or loss caused or contributed to by the landlord.

Key takeaways for tenants

Before agreeing to an indemnity in your lease:

• always seek legal advice to fully understand the scope and implications of the indemnity clause, and how it may impact your financial and legal position; and

• aim to negotiate and limit indemnity clauses to what is reasonable.

 Authors: Eric Kwan, Stella Sun, Melissa Potter