Drafting Tip: Addressing Direct Claims in Indemnity Provisions in Commercial Real Estate Contracts
In commercial real estate contracts, indemnity provisions are a foundational risk allocation tool. They are commonly used to shift responsibility for certain claims and losses from one party (the indemnified party) to another (the indemnifying party). At a high level, an indemnity obligates the indemnifying party to protect the indemnified party from claims or damages—usually those brought by third parties—that arise from the indemnifying party’s actions or presence on the property.
A Common Use Case: Access Agreements and On-Site Work
For example, before a landlord allows a contractor to perform work on a property, or permits a potential purchaser to enter the site for due diligence purposes, it is common for the landlord to require an indemnity. This indemnity protects the landlord against claims or damages arising out of the conduct of the third party on the property.
Now, if that third party damages the landlord’s own property, the landlord can typically bring a direct claim for breach of contract or negligence—no indemnity is required for that. But if the third party causes harm to someone else’s property or person—say, a contractor damages a tenant’s leased premises—the tenant may sue the landlord, claiming the landlord is responsible for the damage caused by its contractor. In that case, the landlord may be left to defend the lawsuit and, if found liable, pay damages. Without an indemnity, the landlord might need to pay first and seek reimbursement from the contractor afterward. With a well-drafted indemnity provision that includes a duty to defend, the landlord can tender the tenant’s claim to the contractor and require the contractor to defend and resolve the matter directly. That’s the fundamental purpose of indemnity provisions.
The Role of Indemnities in Broader Contractual Risk Allocation
Indemnities like these appear in nearly every type of commercial real estate agreement: leases, purchase agreements, loan documents, access agreements, easements, construction contracts, licenses—the list goes on. These provisions are often paired with another standard contractual feature: the limitation of liability clause. A limitation of liability provision caps the amount one party can recover from the other if something goes wrong. These caps are designed to provide predictability and prevent minor contracts from carrying disproportionate risk—especially important in scenarios where low-dollar services or obligations could otherwise lead to high-dollar liability (think of a small repair that causes major building damage).
The Problem: Indemnity Provisions That Sweep Too Broadly
One area in which issues may arise is in the overlap between indemnities and limitation of liability provisions. Many limitation of liability clauses expressly exclude indemnity claims from the liability cap—meaning indemnity claims are not limited in the same way that direct breach claims are.
That’s not necessarily a problem—if the indemnity is limited to third-party claims. But indemnity provisions are sometimes drafted more broadly than the parties intend, requiring the indemnifying party to indemnify the other party against “all claims,” rather than “all third-party claims.” This small difference in language can potentially open the door to unexpected and unintended consequences.
The Unintended Consequence: Direct Claims Through the Back Door
If a party can bring a direct claim—i.e., a claim by one contracting party against the other—under the indemnity provision, and indemnity claims are excluded from the liability cap, then the limitation of liability clause may be rendered ineffective. In other words, a party might circumvent a carefully negotiated damages cap simply by bringing its claim under the indemnity provision rather than under a tort or breach of contract theory.
Note however that courts have split on the interpretation of indemnification provisions that are silent on their applicability to direct claims. For a greater examination, see two excellent articles by Glenn West: The First-Party/Third-Party Claim Distinction in Indemnification Provisions—Unambiguously Broad Is Not Necessarily the Same Thing as “Clear and Unequivocal” and Indemnify is a Funny Word Carrying Historical Baggage—Be Aware and Use with Care.
Drafting Recommendation: Be Clear About What the Indemnity Covers
Given these risks, it is important that drafters align the indemnity language with the parties’ expectations. If the indemnity is intended to cover only third-party claims, the language should say so explicitly—for example, by requiring indemnification for “claims brought by third parties.” This protects the limitation of liability clause from being overridden.
Alternatively, if the parties intend the indemnity to cover both third-party and direct claims, the provision should expressly state that intention. But if the indemnity covers direct claims, the contract should also address how that interacts with the limitation of liability clause—either by applying the cap to those claims, or by excluding direct indemnity claims from the cap intentionally and transparently.
Other Considerations When Evaluating Direct Claims in Indemnity Provisions
While it is frequently argued that the inclusion of direct claims within an indemnity provision are unnecessary and redundant as a party to a contract can already bring a direct claim for breach of contract or negligence, however, indemnity provisions that include direct claims may provide enhanced remedies—for example, the ability to recover attorneys’ fees, which might otherwise be unavailable under applicable law.
Indemnity provisions may also impose obligations without requiring the indemnified party to prove a breach—just that certain losses occurred “arising out of” a party’s conduct or contract performance. That can be a powerful tool in favor of the indemnified party.
From the indemnifying party’s perspective, a well-structured indemnity provision that includes a direct claim and a sole remedy clause may actually help contain liability, by defining and limiting the scope of potential claims. But this only works if the indemnity is drafted clearly and in harmony with the broader liability allocation in the agreement.
Where insurance coverage is involved—a duty to defend (frequently included in an indemnity provision) may also streamline the process of tendering a claim to the indemnifying party’s insurer.
Conclusion
Indemnity provisions play a significant role in allocating risk in commercial real estate contracts. But their effectiveness depends on careful drafting and clear alignment with other key provisions, such as limitations of liability. Overly broad indemnity language can lead to unintended results and undermine the parties’ expectations. By taking the time to clarify the scope of indemnified claims—especially whether direct claims are included—parties can help ensure that these provisions function as intended and support a balanced contractual framework.
