Daily Development for
Friday, January 10, 1997

by: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law

LANDLORD AND TENANT; INDEMNITY: An agreement in a real estate lease to shift responsibility for fire protection sprinkler system from landlord to tenant is not void as against public policy. Fresh Cut, Inc. v. Fazli, 650 N.E. 2d 1126 (Ind. 1995).

A municipal ordinance required an owner of commercial property to maintain a fire protection sprinkler system. The lease agreement allegedly placed responsibility for maintenance of the fire protection sprinkler system on the tenant. A portion of the warehouse occupied by the tenant burned down. The tenant recovered from his property insurance carrier and then joined with its insurer in a claim of negligence against the landlord. When the landlord raised the defense of the delegation in the lease, the plaintiffs argued that the responsibility to comply with a municipal safety ordinance was nondelegable to the tenant.

The lower court dismissed the complaint. On appeal: held: Affirmed.

The court held that nothing in the municipal ordinance at issue restricted the ability of an owner to delegate responsibility for sprinkler systems to tenants and that, given the nature of the subject matter and the parties' relative bargaining power and freedom to contract, the contract shifting responsibility for this sprinkler system from owner to tenant was not void against public policy.

Note, however, that the court's vote was 3-2. A strong dissent argued that invalidating agreements to shift risk of compliance with public safety laws is the best way to insure that these laws are enforced, and thus to insure public safety.

The court, however, remanded for a determination as to whether the lease, which required compliance with laws but did not mention the sprinkler system specifically, did in fact allocate the risk to the tenant.

Comment 1: The only parties with interests in this litigation are the landlord and tenant. Courts are far less likely to conclude that the parties can shift possible liability for injury to third parties resulting from breach of municipal ordinance. The landlord will be liable to third parties, even if the landlord has required the tenant to comply with the ordinance. Although the landlord may be able to recover indemnification from the tenant, the landlord cannot avoid "first line" responsibility for tort claims.

Comment 2: This potential liability may be an adequate response to the concerns of the dissenters. Even with an indemnification agreement, landlords still have an incentive to see to it that municipal ordinances are satisfied.

Some might argue that the landlord will not really be sensitive to compliance issues if it has shifted financial risk to the tenant. But such parties do not understand modern commercial leasing. In fact, even if the landlord has not shifted financial risk to the tenant, the landlord will have shifted the financial risk to insurers. It is a rare and fortunate commercial landlord (or tenant) who can afford to "self insure." In most cases, insurance companies bear most of the risk of destruction to the premises as well as injury to third parties. That was the situation in the case at hand. The parties really were arguing about rights to an insurance award paid by the tenant's insurer.

As insurers bear the actual risk, both the for landlord and the tenant, it is the insurers who ought to be motivated by liability concerns to oversee compliance with municipal safety laws. That motivation ought to be the same whether the insurer is covering the landlord's exposure or the tenants.

Obviously, liability laws address the irresponsible few as well as the responsible majority, and the editor recognizes that third party plaintiffs still should have a right to recover from landlords who have failed to oversee their tenant's compliance with safety laws even though the lease requires the tenants to do so. This insures adequate compensation when injury occurs.

But if the question is whether permitting landlords and tenants to allocate duties between themselves will lead to greater or lesser compliance with municipal ordinances, the editor suggests that the answer is that it is likely there will be little impact one way or the other. The motivation to oversee compliance will be present regardless of the allocation in the lease, and in most cases, the motivation will be upon the insurers, not the parties.

Items in the Daily Development section generally are extracted from the Quarterly Report on Developments in Real Estate Law, published by the ABA Section on Real Property, Probate & Trust Law. Subscriptions to the Quarterly Report are available to Section members only. The cost is nominal. For the last five years, these Reports annually have been collated, updated, indexed and bound into the Annual Survey of Developments in Real Estate Law, volumes 1-6, published by the ABA Press. The Annual Survey volumes are available for sale to the public. For the Report or the Survey, contact Stacy Walter at the ABA. (312) 988 5260 or stacywalter@staff.abanet.org

Items reported here and in the ABA publications are for general information purposes only and should not be relied upon in the course of representation or in the forming of decisions in legal matters. Accuracy of data and opinions expressed are the sole responsibility of the DIRT editor and are in no sense the publication of the ABA.