Personal Indemnities in a Commercial Lease

By Ridhima Pathak

Indemnification clauses found in commercial leases are often a mutual indemnification, where both the tenant and landlord indemnify each other for their losses and liabilities, or a unilateral indemnification where an individual indemnifies for any claims arising under the lease.

In commercial leasing deals, landlords commonly require corporate tenant’s to provide a personal indemnity. A personal indemnity means that the individual/indemnifier must accept personal financial responsibility of a defaulting tenant in a commercial lease.

Landlords want to ensure that they are reducing any risks associated with the tenant defaulting on rent payments, the corporation going bankrupt or insolvent, and leasing to a tenant that is a smaller corporation with limited assets leaving the landlord with limited options to seek repayment of rent. A personal indemnity in this regard would be an additional form of security, and a landlord would be within their rights to hold the indemnifier fully responsible for rent due, for example.

It is critical that parties review the indemnity clause in full as open-ended indemnities may lead to open interpretation. A tenant can mitigate a personal indemnity by negotiating a monetary limit or limited duration of the indemnity. Whereas a landlord may wish to negotiate that the indemnity survive any transfers of the lease agreement. A properly drafted indemnity clause should define the event or circumstance that gives rise to the indemnity obligation and the scope of the indemnity i.e. monetary responsibility, losses or claims. It is important that the parties define the terms of the indemnity so there is no room for ambiguity or contention on what the indemnity is for.

Given the potential financial exposure, a commercial lease should always be reviewed by a lawyer so that they can review clauses such as indemnities to highlight what your obligations as a tenant are. You should ensure that the commercial lease is conditional upon the review of solicitor prior to firming up your lease.

If you wish to have a commercial lease drafted or reviewed, please contact Ridhima Pathak (ridhima@sorbaralaw.com).