Issue link: https://read.dmtmag.com/i/733263
OCTOBER 2016 18 THE JOURNAL COMMUNITY LAW BY SEAN G. O'HAIR Leases and Contractual Indemnity Rental agreements (both commercial and res- idential) constitute the major contractual rela- tionship between a landlord and a tenant. And that contract is more than simply the amount of rent and the term (length) of the agreement. As such, it is important to be clear as to the parties respective duties when crafting a lease agreement or negotiating the terms of such an agreement. As a recent California case, Morlin Asset Man- agement L.P. v. Edward M. Murachanian, demon- strates in the context of an indemnity clause in a commercial lease, an ounce of prevention is worth a pound of cure. An indemnity clause is "[a] contractual pro- vision in which one party agrees to answer for any specified or unspecified liability or harm that might occur." (Black's Law Dictionary, 3d. Pocket Edition, 2006, West Publishing Co.) The Morlin Asset Management case involved a commercial Tenant, a dental office, and a land- lord. The tenant hired a cleaning service to clean the suite, but one of the employees of the clean- ing service spilled water on the stairs in the com- mon area of the building, and then slipped and fell on those same wet stairs, and was injured. The employee of the cleaning service sued the landlord on a theory of premises liability. The landlord then sued the tenant based on an in- demnity clause contained in the lease. The con- tractual clause at issue read as follows: "Except for Lessor's gross negligence or willful misconduct, Lessee shall indemnify, protect, de- fend and hold harmless the Premises, Lessor and its agents, Lessor's master or ground lessor, part- ners and Lenders, from and against any and all claims, loss of rents and/or damages, liens, judgments, penalties, attorneys' and consult- ants' fees expenses and/or liabilities arising out of, involving or in connection with, the use and/or occupancy of the Premises by Lessee. If any action or proceeding is brought against Les- sor by reason of any of the foregoing matters, Lessee shall upon notice defend the same at Lessee's expense by counsel reasonably satisfac- tory to Lessor and Lessor shall cooperate with Lessee in such defense. Lessor need not have first paid any such claim in order to be defended or indemnified." The Landlord's argument was that the Tenant had hired the cleaning service in connection with the use of the premises at issue. The Tenant ar- gued the accident happened in a common area and thus was not covered by the indemnity clause. The Tenant moved for summary judg- ment which, was granted because the Court found that the lease obligated the tenant to in- demnify the landlords only against claims involv- ing the Premises , which had a specific definition in the lease at issue and did not include stairwells (a common area). Because it was undisputed that plaintiff was injured on the stairwell, which was within a common area which was undisput- edly under the control of the landlord, the trial court found the tenant had no indemnification obligation as a matter of law under the rental contract. The appellate court upheld the trial court's judgment on that basis. Furthermore, because there was a written contract addressing the obli- gations to indemnify, the Landlord could not rely on an equitable indemnity argument under Cali- fornia law because when there is an indemnity clause in a written contract, the contract con- trols. It is important to note that this was a motion for summary judgment, because the judges did not merely weigh evidence and happen to find for the Tenant. Rather the appellate court held that the law required judgment for the Tenant. That is to say, despite all the capable arguments of the Landlord that the Tenant caused the litigation by bringing the Plaintiff to the property to clean the Premises (which were the subject of the indem- nity clause) the landlord was unable to overcome the terms of the lease that was drafted years be- fore the incident at issue. Here are at least three lessons to be learned from this case: 1) Pay close attention to the defined terms in your lease agreements (or any agreements). Those definitions will likely be used to interpret every instance of that word being used in your lease. Make sure that every incidence of the de- fined terms in every paragraph of your lease con- forms with your intent. Here, the court used the definition of "Premises" in the lease to interpret the indemnity clause (which included that de- fined term). That caused the court to exclude activity in the common areas of the building. The implication is that had the Landlord in this case used a different defined term in the indemnity clause ("building" for example) that encompassed both the suite leased by the Tenant and the com- mon areas, the result may well have been differ- ent. 2) Be as specific as possible. Some clients re- quest shorter, simpler leases for ease of under- standing. And there is something to be said for simplicity. But it is important to understand the risks of simplicity. In the above case a defined term was used to interpret the indemnity clause in a way that limited the Landlord's ability to ob- tain indemnity. Words were surely saved, but the point of having contractual indemnity was lost. As such, a cost-benefit analysis must always be undertaken. This case demonstrates the ben- efit of a detailed lease that incorporates years, if not decades, of revisions based on the experience of the drafter. Indeed, if one had to guess, it is not difficult to imagine that the lease at issue in this case has already been modified to protect the Landlord in the same factual situation as arose in the subject case. 3) Have a professional review your lease agreement. There is no indication that the lease at issue in this case was not reviewed or prepared by a professional. But a real estate professional will, as a result of his or her experience and ex- pertise, be able to protect you from many sce- narios that you may not have considered. That should include the scenario of this case, whether or not this decision had been made. Sean G. O'Hair is a litigation associate with the Southern California law firm of Hart King and a member in the firm's manufactured housing industry practice group. He can be reached at (714) 432-8700, (657) 622-4716 direct dial or at sohair@hartkinglaw.com. His article is for gen- eral information purposes and is not intended to be and should not be taken as legal advice for any reader. T J