By: Brian D. Kaider, Esq.
Most breweries and distilleries are built on leased property. Negotiating the lease can be a daunting task, as these contracts are commonly over fifty pages long and full of dense legal language that can be difficult to understand. Additionally, many landlords have “standard” leases to which they expect the tenant to agree with minimal changes. Aside from definitions of rent and the duration of the lease, many tenants simply accept the remainder of the lease, as is. More savvy tenants may negotiate issues such as the right to penetrate walls or ceilings for equipment ventilation, the use of outdoor space/common areas, or the state to which the premises must be restored following termination of the lease. But, there is a section in virtually every lease that is typically ignored and has important consequences: the “indemnification clause.”
What is an Indemnification Clause?
In the simplest terms, an indemnification clause identifies who is responsible if a third party (e.g., a customer) is injured on or around the leased property. Most often, the injury refers to a physical injury, such as when a customer slips and falls on a wet floor. The language of the clause typically provides that in such a case, if an injured customer sues the landlord as a result of the fall, the tenant agrees to compensate the landlord for any expense associated with the claim. This makes sense, because the landlord cannot be expected to supervise every action of the tenant and if the tenant allows a hazardous condition, like a wet floor, to exist, the landlord should not be held responsible for the tenant’s negligence. Of course, circumstances are often not as simple as this example and there is a lot of gray area in these clauses that may not be immediately apparent.
After reading this article, it may be tempting to try to negotiate taking the indemnification clause out of the lease entirely. First, it is unlikely any landlord would agree to the deletion. Second, it would actually cause more problems that it solves. Absent the indemnification provisions of the lease, the landlord could still file a legal claim against the tenant under a variety of legal theories to recover any damages they suffer as a result of the third-party claim. The better course is to negotiate the terms of the indemnification clause to minimize exposure of the tenant and ensure that the terms are clear and unambiguous.
The Guts of an Indemnification Clause
The typical indemnification clause is composed of very long sentences with multiple subparts that make it difficult to even read, much less understand. The following is a breakdown of some of the key terms.
Definition of the Parties – “Landlord Parties” and “Tenant Parties,” or similar terms are defined to include each respective company along with their owners, officers, directors, shareholders, affiliates, agents, employees, representatives, etc. In other words, if an injured customer sues the owner of the landlord company, this definition includes the owner as an indemnified party, just as if the customer had sued the landlord company, itself.
Required Actions – Every indemnification clause will use some or all of the following terms: “indemnify,” “defend,” and “hold harmless.” While at first glance these terms would appear to mean the same thing, they are very different and which terms are used has important consequences. In particular, “indemnify” and “hold harmless” seem similar and, in fact, the differences between them varies from state to state. In general, “hold harmless” means that the landlord will not be held liable for any injuries or damages caused by the tenant. In other words, if the tenant is sued by an injured customer, tenant will not blame the landlord or try to bring the landlord into the case as a separate defendant. “Indemnify,” on the other hand, means that if the landlord is sued by the injured customer, the tenant agrees to reimburse them for costs incurred as a result of the lawsuit. “Defend,” however, means that tenant is responsible for defending the landlord from lawsuits. That word in the clause should then trigger other questions, such as, who chooses the counsel to defend the landlord? Does the landlord have the right to approve the proposed counsel? And what happens if there is a conflict of interest between the landlord and tenant being represented by the same counsel? Those issues should all be addressed in the indemnification clause. If the word “defend” is not in the clause, though, that means the landlord is free to choose its own counsel to represent them and tenant is still responsible for the landlord’s legal fees, meaning tenant may be paying two different law firms to fight the same case.
Scope of Covered Claims – The clause should have some description of the types of expenses that are covered. In some cases, it is extremely broad, such as “any and all costs suffered by or claimed against landlord, directly or indirectly, based on, arising out of, or resulting from tenant’s use and occupancy of the premises or the business conducted by tenant therein.” The description may be limited to only physical injury, death, or damage to property. In some cases, it may refer to “reasonable claims.” Of course, what is reasonable is a subjective question and likely to spur additional legal battles. In some cases, the lease may require the tenant to warrant that they do not and will not infringe on another party’s trademark rights. The tenant should always try to limit the scope of such terms to only “knowingly” infringe or infringing “known” trademark rights. Otherwise, it would impart on the tenant an obligation to scour the earth for all trademarks that could possibly be asserted against it; an impossible task.
Scope of Covered Property – It should be clear exactly what property is covered by the indemnification clause. Often a lease will make a distinction between the “Premises” and the “Property.” Premises usually refers to the actual unit that the tenant is renting, whereas Property refers to the entire parcel of real estate owned by the landlord, which may include other rented units and common areas. Obviously, a tenant should not be required to indemnify the landlord against something done by another tenant in a separate unit. But, common areas are much more tricky. Often, either explicitly in the lease or by oral agreement, a landlord will permit a brewery tenant to occupy common areas, including parking lots, to serve beer and/or allow customers to eat and drink. If someone drops a glass in the parking lot and the brewery does not clean it up promptly and a customer is cut by the broken pieces, the indemnification clause should protect the landlord if the customer sues. But, if the landlord is responsible for snow removal in the parking lot and fails to adequately perform its obligations and a customer slips and falls when getting out of her car, the tenant will want such incidents to be outside the scope of indemnification. If the clause is not worded carefully, that distinction may not be recognized by a court.
Carve-Outs for Landlord’s Activity – This raises the broader issue of carve-outs in the indemnification clause for landlord’s activity that contributed to the injury. For example, if the landlord was responsible for the build-out of the premises and was negligent in the installation of the electrical system, then if a customer is electrocuted, the tenant should not be required to indemnify the landlord against such latent defects. Even then, the choice of wording in the clause is important. Some leases only carve out “gross negligence,” “recklessness,” or “willful misconduct.” In that case, if the injury is caused by landlord’s “ordinary negligence” that does not rise to the level of gross negligence, the tenant would still be required to indemnify the landlord against such claims. It is worth noting, however, that some states hold such clauses to be against public policy, void, and unenforceable. Those cases, however, often turn on whether the part of the property in question was under the exclusive control of the tenant.
Landlords generally provide the first draft of a commercial lease and, not surprisingly, they are drafted heavily in favor of the landlord. While a tenant’s focus may be on maximizing building improvement allowances and minimizing rent, they should review the entire lease thoroughly, and preferably with assistance from an attorney knowledgeable about the beverage industry.
Often, the landlord will be in a position with greater bargaining power than the tenant, but the law will view both parties to a commercial lease as being sophisticated enough to negotiate the terms of the agreement they consider important. A court is unlikely to be persuaded that the tenant did not understand the terms or had no choice but to accept them. The indemnification clause should clearly set forth the responsibilities of each party in clear and unambiguous terms, including: the covered property, the scope of covered claims, what actions the tenant is required to perform in the event of a complaint, and what landlord activity is excluded from the indemnification.
Brian Kaider is the principal of KaiderLaw, a law firm with extensive experience in the craft beverage industry. He has represented clients from the smallest of start-up breweries to Fortune 500 corporations in the navigation of regulatory requirements, drafting and negotiating contracts, prosecuting trademark and patent applications, and complex commercial litigation.