A recent California case illustrates the importance of clear indemnity clauses in leases to ensure proper apportionment of liability between landlord and tenant. In Morlin Asset Management LP v. Murachanian, the Court of Appeal held that if a matter is not expressly and specifically covered in a lease indemnity, then there is likely no claim by the indemnified party in reliance on such indemnity, whether under equitable principles or under the lease itself (2 Cal.App.5th 184 (2016)).
In Morlin Asset Management LP, a carpet cleaner fell and injured himself on the stairs in the common area of a building. He was at the building because he had been hired by the tenant (“Tenant”) to clean the carpets within the leased premises. The carpet cleaner brought an action against the landlord (“Landlord”), as the owner of the building, for negligence and premises liability. Landlord filed cross-complaints against Tenant for equitable indemnity (alleging any injuries to the carpet cleaner were caused by the tenant), apportionment of fault and express indemnity pursuant to the lease. The lease required Tenant to indemnify Landlord for any matter “arising out of, involving or in connection with the use and/or occupancy of the Premises by lessee”. Landlord argued that this accident was within the scope of the broad indemnity language and Tenant should reimburse Landlord for any damages that Landlord had to pay to the carpet cleaner. Tenant contended that this accident occurred outside the premises and thus was not covered by the terms of the indemnity. The Superior Court agreed with Tenant and granted its motion for summary judgment. Landlord appealed.
On appeal, Landlord argued that the accident “arose from the tenant’s use of the suite” since it would not have occurred but for Tenant hiring the carpet cleaner to clean the carpets in the premises. Landlord also pointed to a lease provision which exempted Landlord from liability for injury or damage to person or property “in or about the Premises”, as well as the rules and regulations of the lease which provided Tenant could not employ a contractor for work in the building without Landlord approval, which Tenant had not done in this case. Though those lease provisions supported Landlord’s claim that Tenant had culpability in this case, the Court of Appeal noted that the lease contained a provision which gave the Landlord exclusive control and management of the common areas of the building (like the stairs), including the responsibility to keep the same in good condition and repair. Therefore, Tenant had no control over the condition of the stairs, which were arguably in an unsafe condition.
Regardless of the other lease provisions, Landlord stated that the Court should construe the indemnity language liberally in favor of Landlord as the promisee. Landlord cited to case-law where California courts gave a broader interpretation to the language “arising out of” in various kinds of insurance provisions. The Court of Appeal distinguished this argument and explained that in non-insurance agreements (like a lease), indemnity language must be clear, explicit and construed strictly against the promisee. Therefore, when reviewing the language strictly, the Court of Appeal found that the connection between Tenant’s use of the suite and the accident in the stairwell over which Tenant had no control was too remote and not within the parties contemplation when they entered into the lease.
The Court of Appeal also reviewed Landlord’s claim for recovery under the premise of equitable indemnity. A claim for equitable indemnity arises when one party has been ordered to pay damages to another party as a result of a third party’s wrongful acts. The party ordered to pay damages then seeks recovery from the wrongful third party under principles of equity or fairness, rather than contract. The Court of Appeal ultimately denied this claim citing to case-law which held that if there is an express contractual provision establishing a duty in one party to indemnify another, the extent of the duty must be determined from the contract and not from the independent duty of equitable indemnity. Therefore, the indemnity language in the lease controls and governs the scope of what is covered, regardless of any fairness argument.
This case is an important reminder to ensure indemnity clauses in leases are clear, specific and cover all aspects of intended liability between landlord and tenant. Otherwise, a party may believe they are being indemnified for certain matters in a lease due to broader language and find out they are not in fact covered when a third party makes a claim.
The issues discussed in this update are not intended to be legal advice and no attorney-client relationship is established with the recipient. Readers should consult with legal counsel before relying on any of the information contained herein. Reuben, Junius & Rose, LLP is a full service real estate law firm. We specialize in land use, development and entitlement law. We also provide a wide range of transactional services, including leasing, acquisitions and sales, formation of limited liability companies and other entities, lending/workout assistance, subdivision and condominium work.