Where Can Risk Be Reallocated by the Contract?

As the business cycle grinds forward in a low-growth environment, it is clear that considerably more time is being made available to long-term commitments such as real estate lease contracts. Several areas present opportunities for both Landlord and Tenant representatives to utilize the Lease negotiation to reduce their parties’ risk via the language of the agreement.

Certain deals may go into significant detail on any one area, and Reed Smith is looking forward to assisting you with that transaction.

Here are the high points:

Know what you are renting. Avoid the desire to make assumptions about the description of the project, building, premises and common area. Ask any questions necessary, particularly if you will not be able to visit the site. Items to focus on: (1) ensure that responsibility of Tenant covers all matters concerning the Premises space, and align that description with all areas to be given exclusively to Tenant, and (2) be clear if the Building is part of a larger project, and what responsibilities the parties will have over common areas of the project, including liability for damage to property and bodily injury to persons.

The dry, dull indemnification clause. It is no mystery that the language of an indemnity provision will flow along like a serpentine river. But did you understand it when you finished reading it, or did you have to hold back a yawn? Items to focus on when considering the indemnity: (1) ensure the indemnity being given excludes the grossly negligent acts of the other party, (2) where practicable, limit the extent of the indemnity given to the amount of the insurance coverage your party will be carrying, and (3) place time limits after the contact ends on the indemnity obligations.

To insure or not to insure. The insurance provisions are typically fully negotiated. Do not miss the opportunity to cover a risk by insisting that the contract contain insurance language that places obligations to provide separate policies on both parties. Do not insure over any other party’s negligent acts or omissions where damage can result from such failure to meet the standard of care. For parties that will self-insure over any matters, be certain to obtain clear approval from senior representatives of that party after limiting the extent of the self-insurance and, if appropriate, placing a cap on the extent of any monies that would be paid out in the circumstances of a claim.

Limit to the Parties. In all instances, provide clarity as to which party will be held accountable for damages, and prevent any claim for contract default from attaching to affiliated entities.

For more information and thoughts on how best to negotiate a Lease transaction, please contact our partner Simon T. Adams, Esq. – Tel: 415 659 5984 or email: stadams@reedsmith.com.