Question: Is a commercial lease's broad indemnification provision, requiring the tenant to indemnify the landlord for any accident occurring in the leased premises "unless caused solely by landlord's negligence," enforceable?
For reasons explained below I conclude that the indemnification clause, which was coupled with an insurance procurement provision, obligates the tenant to indemnify the landlord for its share of liability, and that such a lease provision does not violate General Obligations Law § 5-321.
Landlord leased a portion of its building located to Contractor. The lease required Contractor to indemnify Landlord as follows:
“Tenant shall indemnify and hold harmless Landlord ... from and against any and all claims arising from or in connection with (A) the conduct or management of the Premises or of any business therein, or any work or thing whatsoever done, or any condition created (other than by Landlord) in or about the Premises during the term of this Lease ...; (B) any act, omission or negligence of Tenant or any of its subtenants or licensees ... or contractors; (C) any accident, injury or damage whatsoever unless caused solely by Landlord's negligence) occurring in, at or upon the Premises; and (D) any breach or default by Tenant in the full and prompt payment and performance of Tenant's obligation under this Lease ....”
The lease further obligated Contractor, at its expense, to maintain a comprehensive general liability insurance policy naming Landlord as an additional insured with coverage to be no less than $5 million “combined single limit per occurrence for bodily injury and property damage liability.” Another lease term directed Landlord and Contractor to obtain mutual waivers of subrogation in their respective insurance policies. Contractor procured the specified insurance coverage, and Landlord also maintained a separate insurance policy for the building.
After entering into the lease, Contractor hired a mechanical contractor to perform work on an existing sprinkler system as part of the project. During construction, a flood occurred, causing property damage to the premises of a tenant on the floor below. The water damage resulted from the failure to drain the pipes properly before beginning the sprinkler work.
The tenant below’s insurer-commenced a subrogation action against Landlord, Contractor and subcontractor to recover the monies it had paid to its insured on its property damage claim. Landlord interposed a cross claim against Contractor for contractual indemnification. The subrogation action was settled for $200,000 and all claims and cross claims among the parties were resolved, except for Landlord's indemnification claim against Contractor. As part of the settlement, the parties stipulated that if the case had been tried by a jury, 90% of the liability would have been allocated to Landlord and 10% to the subcontractor. After the settlement, Landlord moved for summary judgment against Contractor on its claim for contractual indemnification.
Contractor advances two arguments to support its position that Landlord is not entitled to contractual indemnification. First, Contractor asserts that the language of the lease provision at issue does not unmistakably require indemnification under the circumstances of this case. Alternatively, even if interpreted to entitle Landlord to indemnification, Contractor urges that the lease provision is unenforceable and contrary to public policy under General Obligations Law § 5-321 because it obligates a tenant to indemnify a landlord for the landlord's own negligence. I address each contention in turn.
Courts will construe a contract to provide indemnity to a party for its own negligence only where the contractual language evinces an “unmistakable intent” to indemnify. Here, subsection (C) of the indemnification clause in the lease required Contractor to indemnify Landlord for “any” accident occurring in Contractor's premises “unless caused solely by [Landlord's] negligence.” This broadly drawn provision unambiguously evinced an intent that Contractor indemnify Landlord for the latter's own negligence, provided Landlord was not 100% negligent. In this case, the parties stipulated that Landlord was 90% at fault and Contractor's contractor was 10% responsible for the water damage. Hence, Landlord was not solely liable under the terms of the stipulation and the clear language of the lease unmistakably affords indemnification under the circumstances of this case.
Having concluded that the indemnification provision was triggered, I next consider the contention that the provision is nevertheless unenforceable in light of General Obligations Law § 5-321. That statute provides:
“Every covenant, agreement or understanding in or in connection with or collateral to any lease of real property exempting the lessor from liability for damages for injuries to person or property caused by or resulting from the negligence of the lessor, his agents, servants or employees, in the operation or maintenance of the demised premises or the real property containing the demised premises shall be deemed to be void as against public policy and wholly unenforceable.”
This case presents a commercial lease negotiated between two sophisticated parties who included a broad indemnification provision, coupled with an insurance procurement requirement. That arrangement afforded the tenant below who sustained water damage, adequate recourse for the damages it suffered. Additionally, Contractor's insurer-not Contractor itself-will bear ultimate responsibility for the indemnification payment, which is precisely the result contemplated by the parties when they entered into the lease. Where, as here, a lessor and lessee freely enter into an indemnification agreement whereby they use insurance to allocate the risk of liability to third parties between themselves, General Obligations Law § 5-321 does not prohibit indemnity.