Presenting a live 90-minute webinar with interactive Q&A Allocating Risk in Real Estate Leases: Contractual Indemnities, Additional Insured Endorsements, Subrogation Waivers Coordinating Lease Provisions With Insurance Coverage to Mitigate Landlord and Tenant Liability Risks WEDNESDAY, OCTOBER 3, 2018 1pm Eastern 12pm Central 11am Mountain 10am Pacific Today s faculty features: Scott D. Brooks, Partner, Cox Castle & Nicholson, San Francisco The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 1.
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ALLOCATING RISK IN REAL ESTATE LEASES: INDEMNITIES AND INSURANCE Strafford October 3, 2018 Scott D. Brooks Cox, Castle & Nicholson LLP 50 California Street, Suite 3200 San Francisco, CA 94111 sbrooks@coxcastle.com
I. INDEMNITY A. LANDLORD ORIENTED: TENANT INDEMNITY OF LANDLORD 1. Tenant shall be liable for, and agrees, to the maximum extent permissible under applicable Laws, to promptly indemnify, defend and hold harmless Landlord, its affiliated entities, its property manager, Mortgagees and their respective members, partners, officers, directors, employees, agents, successors and assigns (collectively, the Landlord Indemnified Parties ), 2. from and against, any and all claims, damages, judgments, suits, causes of action, losses, liabilities, penalties, fines, expenses and costs, including, without limitation, reasonable attorneys fees and expenses (collectively, Indemnified Claims ), arising out of or resulting from: 3. any damage to any property (including but not limited to property of any of the Landlord Indemnified Parties) or any injury (including but not limited to death) to any person occurring in, on or about the Premises or the Building to the extent that such injury or damage shall be caused by or arise from any actual or alleged act, neglect, fault, or omission by or of Tenant or any Tenant Party to meet any standards imposed by any duty with respect to the injury or damage; 6
I. INDEMNITY CONT. 4. the conduct or management of any work or thing whatsoever done by Tenant or any Tenant Party in or about the Premises or from transactions of the Tenant concerning the Premises; 5. Tenant s failure to comply with any and all Laws applicable to the condition or use of the Premises or occupancy of the Premises; or 6. any breach or default on the part of Tenant in the performance of any covenant or agreement on the part of Tenant to be performed pursuant to this Lease. 7. In case any action or proceeding is brought against Landlord or any Landlord Indemnified Parties by reason of any such Indemnified Claims, Tenant, upon notice from Landlord, agrees to promptly defend the same at Tenant s sole cost and expense. 8. The provisions of this Section shall survive the expiration of the Term or sooner termination of this Lease. 7
B. NEGOTIATED INDEMNITY: PRIMARILY ZONES OF RESPONSIBILITY 1. Tenant indemnity of Landlord with respect to occurrences in the Premises. a) Tenant shall be liable for, and agrees, to the maximum extent permissible under applicable Laws, to promptly indemnify, defend and hold harmless Landlord, its affiliated entities and their respective members, partners, officers, directors, employees, agents, successors and assigns (collectively, the Landlord Indemnified Parties ), b) from and against, any and all claims, damages, judgments, suits, causes of action, losses, liabilities, penalties, fines, expenses and costs, including, without limitation, reasonable defense attorneys fees and expenses (collectively, Indemnified Claims ), arising out of or resulting from c) property damage to third-parties, or bodily injury (including but not limited to death) to any person occurring in, or arising out of the use of the Premises by Tenant or any of the Tenant Parties; or 8
B. NEGOTIATED INDEMNITY: PRIMARILY ZONES OF RESPONSIBILITY CONT. d) the conduct or management of any work or thing whatsoever done by Tenant or any Tenant Party in or about the Premises or from transactions of the Tenant concerning the Premises; e) provided, however, that the foregoing shall not include any indemnification to the extent the same arises or results from the negligence or willful misconduct of Landlord or any Landlord Indemnified Party. f) In case any action or proceeding is brought against Landlord or any Landlord Indemnified Parties by reason of any such Indemnified Claims, Tenant, upon notice from Landlord, agrees to promptly defend the same at Tenant s sole cost and expense. g) The provisions of this Section shall survive the expiration of the Term or sooner termination of this Lease. 9
B. NEGOTIATED INDEMNITY: PRIMARILY ZONES OF RESPONSIBILITY CONT. 2. Landlord indemnity of Tenant with respect to occurrences in the Common Areas. a) Landlord shall be liable for, and agrees, to the maximum extent permissible under applicable Laws, to promptly indemnify, defend and hold harmless Tenant, its affiliated entities and their respective members, partners, officers, directors, employees, agents, successors and assigns (collectively, the Tenant Indemnified Parties ), b) from and against, any and all Indemnified Claims arising out of or resulting from c) any property damage to third-parties, or any bodily injury (including but not limited to death) to any person occurring in, on or about the Common Areas or d) any work or thing whatsoever done by Landlord or any of Landlord s employees, agents or contractors in or about the Common Areas 10
B. NEGOTIATED INDEMNITY: PRIMARILY ZONES OF RESPONSIBILITY CONT. e) provided, however, that the foregoing shall not include any indemnification to the extent the same arises or results from the negligence or willful misconduct of Tenant or a Tenant Indemnified Party. f) In case any action or proceeding is brought against Tenant or any Tenant Indemnified Parties by reason of any such Indemnified Claim, Landlord, upon notice from Tenant, agrees to promptly defend the same at Landlord s sole cost and expense. g) The provisions of this Section shall survive the expiration of the Term or sooner termination of this Lease. 3. Landlord Indemnity Carve Out. a) In no event shall Landlord be liable hereunder for special, indirect or consequential damages including, but not limited to, claims for loss of use, anticipated profit or business opportunity, market-based stigma damages or business interruption, or mental or emotional distress or fear of injury or disease except to the extent awarded to third parties and not Tenant or any of the Tenant Parties. 11
C. MUTUAL INDEMNITY: ZONES OF RESPONSIBILITY 1. Tenant Indemnification of Landlord: Premises and Bad Acts. a) Tenant shall indemnify, defend and hold harmless Landlord, and Landlord s members, partners, shareholders, officers, directors, employees, agents, successors and assigns (collectively, the Landlord Indemnified Parties ), b) from and against, any and all claims, damages, settlements, judgments, suits, causes of action, losses, liabilities, penalties, fines, expenses and costs (collectively, Tenant Covered Claims ), which Tenant Covered Claims shall include, without limitation, reasonable attorneys fees and expenses, to the extent arising or resulting from c) the negligence or willful misconduct of Tenant or Tenant s agents, employees and/or contractors; and/or d) any occurrence within the Premises following delivery of possession of the Premises to Tenant and prior to the expiration of the Term or earlier termination of this Lease except to the extent resulting from the negligence or willful misconduct of Landlord or Landlord s agents, employees and/or contractors. e) In case any action or proceeding is brought against Landlord or any Landlord Indemnified Parties by reason of any such Tenant Covered Claims, Tenant, upon notice from Landlord, agrees to promptly defend the same at Tenant s sole cost and expense by counsel approved in writing by Landlord, which approval shall not be unreasonably withheld, conditioned or delayed. 12
C. MUTUAL INDEMNITY: ZONES OF RESPONSIBILITY CONT. 2. Landlord Indemnification of Tenant: Common Areas and Bad Acts. a) Landlord shall indemnify, defend and hold harmless Tenant and Tenant s members, partners, shareholders, officers, directors, employees, agents, successors and assigns (collectively, the Tenant Indemnified Parties ), b) from and against, any and all claims, damages, settlements, judgments, suits, causes of action, losses, liabilities, penalties, fines, expenses and costs (collectively, Landlord Covered Claims ), which Landlord Covered Claims shall include, without limitation, reasonable attorneys fees and expenses, to the extent arising or resulting from c) the negligence or willful misconduct of Landlord or Landlord s agents, employees and/or contractors; and/or d) any occurrence within the Common Areas except to the extent resulting from the negligence or willful misconduct of Tenant or Tenant s agents, employees and/or contractors. 13
C. MUTUAL INDEMNITY: ZONES OF RESPONSIBILITY CONT. e) In case any action or proceeding is brought against Tenant or any Tenant Indemnified Parties by reason of any such Landlord Covered Claims, Landlord, upon notice from Tenant, agrees to promptly defend the same at Landlord s sole cost and expense by counsel approved in writing by Tenant, which approval shall not be unreasonably withheld, conditioned or delayed. 3. The obligations of the parties pursuant to this Section shall survive the expiration of the Term or sooner termination of this Lease. 14
D. TENANT WAIVER OF CLAIMS. 1. Argument: Tenant to look to its own insurance. a) Notwithstanding anything contained in this Lease to the contrary, b) subject to the provisions of Section 14(d) [rent abatement for prevention from use due to Landlord caused utility interruption or prevention from use] and Section 17(c) [mutual waiver of subrogation], c) neither Landlord nor any of the other Landlord Indemnified Parties shall be liable for d) loss or damage to any property by theft or otherwise, or e) any injury or damage to person or property resulting from fire, explosion, falling plaster, steam, gas, electricity, water or rain which may leak from any part of the Building or from pipes, appliances or plumbing work therein or from the roof, street, sub-surface or from any other place or resulting from dampness or any other cause whatsoever, 15
D. TENANT WAIVER OF CLAIMS CONT. f) except to the extent (i) resulting from the gross negligence or willful misconduct of Landlord or its contractors, agents, servants or employees or breach of this Lease by Landlord and (ii) not covered by the insurance maintained by Tenant (or which would not have been so covered if Tenant had maintained the insurance required to be maintained by Tenant pursuant to this Lease). g) Landlord or its agents shall not be liable for interference with light or other similar intangible property interests h) Tenant shall give prompt notice to Landlord in case of fire or accidents in the Premises or the Building, and of defects therein or in the fixtures or equipment located therein. 16
E. WAIVER OF CLAIMS FOR INTERFERENCE WITH TENANT S BUSINESS 1. Often in Landlord right of entry provision. a) Subject to the provisions of Section 14(d) below [rent abatement for prevention from use due to Landlord caused utility interruption or prevention from use], Tenant hereby waives any claim for damages for any injury or inconvenience to or interference with Tenant's business, any loss of occupancy or quiet enjoyment of the Premises, and any other loss in, upon and about the Premises or the Project. 17
F. LANDLORD LIMITATION OF LIABILITY 1. Customary concept of Landlord liability limited to its interest in the Project and waiver of consequential damages. a) In consideration of the benefits accruing hereunder, and notwithstanding anything contained in this Lease to the contrary, b) Tenant and all successors and assigns covenant and agree that, in the event of any actual or alleged failure, breach or default hereunder by Landlord or in the event of any other action against Landlord with respect to this Lease, their sole and exclusive remedy shall be against Landlord's interest in the Project. c) If Tenant obtains any money judgment against Landlord with respect to this Lease or the relationship between Landlord and Tenant, then Tenant shall look solely to Landlord s interest in the Project to collect such judgment, and Tenant shall not collect or attempt to collect any such judgment out of any other assets of Landlord. 18
F. LANDLORD LIMITATION OF LIABILITY CONT. d) Tenant and all such successors and assigns agree that the obligations of Landlord under this Lease do not constitute personal obligations of the individual partners, whether general or limited, members, directors, officers or shareholders of Landlord, and Tenant shall not seek recourse against the individual partners, members, directors, officers or shareholders of Landlord or any of their personal assets for satisfaction of any liability with respect to this Lease. e) Notwithstanding any contrary provision contained in this Lease, neither Landlord, any of the individual partners, members, directors, officers or shareholders of Landlord or any of their respective employees, agents or contractors shall be liable under any circumstances for any indirect or consequential damages or any injury or damage to, or interference with, Tenant's business, including but not limited to, loss of profits, loss of rents or other revenues, loss of business opportunity, loss of goodwill or loss of use, in each case, however occurring. 19
II. INSURANCE A. Basic Insurance Coverage Requirements. 1. Tenant Insurance. a) Tenant shall, during the Term hereof, at its sole cost and expense, keep in full force and effect the following insurance: i. All Risk or Special Form insurance (including a vandalism and malicious mischief endorsement and sprinkler leakage coverage) upon all of Tenant's personal property, trade fixtures, furniture and equipment in the Premises, in an amount not less than one hundred percent (100%) of the full replacement cost thereof. 20
II. INSURANCE CONT. ii. Commercial general liability insurance coverage, including personal injury, bodily injury, broad form property damage, Premises operations hazard, contractual liability (covering the indemnity contained in Section 15), and products and completed operations liability, with a combined single limit of not less than Three Million Dollars ($3,000,000.00). 1) Such insurance shall name Tenant as named insured thereunder and shall name Landlord, Landlord s property manager, the Landlord Indemnified Parties and Landlord's Lienholders and ground lessors, as designated by Landlord (collectively, the Landlord Additional Insured Parties ), each as additional insureds thereunder, all as their respective interests may appear, shall contain a cross liability endorsement, and shall be primary and noncontributing with respect to any insurance maintained by Landlord or the Landlord Additional Insured Parties. 21
II. INSURANCE CONT. 2) Such liability insurance shall insure Tenant and each additional insured for (1) the actions of Tenant and/or any of Tenant's employees, agents, representatives, contractors and/or invitees, (2) Alterations to, and occurrences in, the Premises, and (3) the use or operation of the Premises. 3) Landlord shall have the right, from time to time, to require an increase in such liability insurance limit if consistent with then standard industry practices for prudent risk management by a tenant of comparably-sized premises within Comparable Buildings. iii. iv. Workers' Compensation and Employer's Liability Insurance in form and amounts as required by applicable law including a waiver of subrogation in favor of Landlord and Landlord Indemnified Parties. Business interruption, extra expense, rental, reimbursement and similar coverage as part of Tenant s commercial property insurance, and in no event shall Landlord be liable for any business interruption or consequential loss sustained by Tenant, whether or not it is insured, even if such loss is caused by the negligence of Landlord, or Landlord s employees, officers, directors, agents or contractors. 22
II. INSURANCE CONT. v. Business Automobile Liability Insurance, including the ownership, maintenance and operation of any automotive equipment, owned, hired and non-owned in an amount not less than One Million Dollars ($1,000,000.00) combined single limit (bodily injury and property damage) per occurrence and in the aggregate. vi. Any other form or forms of insurance as Landlord and Landlord's Lienholders may reasonably require from time to time, in form, in amounts, and for insurance risks against which a prudent tenant of a comparable size and in a comparable business would protect itself given the economic feasibility of such insurance and consistent with then industry standards for prudent risk management by tenants of comparably-sized premises in Comparable Buildings. 23
II. INSURANCE CONT. i. (b) The minimum limits of insurance set forth in this Section 17(a) are not intended to limit the liability of Tenant under this Lease. ii. Notwithstanding any provision of this Lease to the contrary, the obligations of Tenant to provide increased or new insurance under Sections 17(a)(ii) and (vi) above, shall be limited to the extent the same is then customarily provided by comparable tenants of comparably sized premises and having a comparable use in Comparable Buildings and is then reasonably available on a commercially reasonable basis at a reasonable cost. iii. All policies of insurance maintained by Tenant under this Section 17(a) shall be taken out with insurance companies holding a General Policyholders Rating of "A-" and a Financial Rating of "VII" or better, as set forth in the most current issue of Best's Insurance Reports. iv. As soon as practicable after the placing of the required insurance, but prior to the date Tenant takes possession of all or part of the Premises, Tenant shall deliver to Landlord certificates evidencing the existence of the amounts and forms of coverage required hereunder. 24
II. INSURANCE CONT. v. No such policy shall be cancelable or reducible in coverage except after at least thirty (30) days prior written notice to Landlord. vi. Tenant shall, within thirty (30) days prior to the expiration of such policies, furnish Landlord with certificates of renewals or binders thereof; provided that if Tenant fails to furnish the same, Landlord may, following ten (10) days' notice to Tenant, order such insurance and charge the reasonable cost thereof to Tenant. If Landlord obtains any insurance that is the responsibility of Tenant under this Section 17(a), Landlord shall deliver to Tenant a written statement setting forth the cost of any such insurance and showing in reasonable detail the manner in which it has been computed and Tenant shall promptly remit said amount to Landlord, as Additional Rent within ten (10) days following receipt of the written statement. vii. Tenant may satisfy its insurance obligations under this Lease by blanket, umbrella and/or, as to liability coverage in excess of One Million Dollars ($1,000,000), excess liability coverage, so long as the coverage afforded under the applicable policy is not reduced or diminished as a result thereof. 25
II. INSURANCE CONT. 2. Landlord Insurance. a) During the Term, Landlord shall carry the following insurance: i. 1. Special Form or equivalent insurance (including a vandalism and malicious mischief endorsement and sprinkler leakage coverage, and also covering such other risks as Landlord or Landlord s lender may require) upon the Project (but excluding any property which Tenant is obligated to insure under Section 17(a) above) 2. in an amount not less than ninety percent (90%) of the full replacement cost thereof (excluding footings, foundations and excavation), 3. and including commercially reasonable rental loss coverage for losses covered by such insurance policy. 4. Such insurance policy shall include coverage of the Tenant Improvements (as modified from time to time by Tenant s Alterations) and the parties shall reasonably cooperate to allow for proper valuation thereof for insurance purposes. 26
II. INSURANCE CONT. 5. Such insurance policy or policies shall name Landlord as a named insured. 6. The deductible under such policy shall not exceed such amount as Landlord determines to be appropriate given prudent risk management practices. 27
II. INSURANCE CONT. ii. Commercial general liability insurance coverage, including personal injury, bodily injury, broad form property damage, Premises operations hazard, contractual liability (covering the indemnity contained in Section 15), and products and completed operations liability, with a combined single limit of not less than Three Million Dollars ($3,000,000.00). b. Landlord may satisfy its insurance obligations under this Lease by blanket, umbrella and/or, as to liability coverage in excess of One Million Dollars ($1,000,000), excess liability coverage, so long as the coverage afforded under the applicable policy is not materially reduced or diminished as a result thereof. 28
II. INSURANCE CONT. 3. Mutual Waiver of Subrogation. a) All policies of property damage insurance required hereunder shall include a clause or endorsement denying the insurer any rights of subrogation against the other party to the extent rights have been waived by the insured before the occurrence of injury or loss, if same are obtainable without unreasonable cost. To the extent such a waiver of subrogation is obtainable, neither Landlord nor Tenant shall be liable to the other for any damage caused by fire or any of the risks insured against or required to be insured against under any property insurance policy required by this Lease. Landlord and Tenant waive any rights of recovery against the other for injury or loss due to risks covered by or required to be covered by such policies of property damage insurance containing such a waiver of subrogation clause or endorsement to the extent insurance proceeds cover the injury or loss. 29