“Arising out of” Thin Air: New Case Analyzes Indemnity Clauses

Commercial leases often include boilerplate indemnity language that requires tenants to indemnify their landlords for claims “arising out of” the tenant’s use of their premises. Although leases frequently include this language or a similar phrase, the meaning of this language is not always clear. A California Court of Appeal decision recently examined the scope of this language, and the court’s ruling could cause landlords to revisit their boilerplate indemnity provisions.

In Morlin Asset Management LP v. Murachanian,[i] an employee of a carpet cleaning company sued the owners and managers of a building for injuries he suffered after slipping and falling in a stairwell of the building. The employee was at the building to clean carpets in a dentist office operated by a tenant of the building. The owners and managers of the building (the landlords) filed cross-complaints against the dentist (the tenant) for, among other claims, express indemnity under the terms of the tenant’s lease. The Superior Court of Los Angeles County granted summary judgment for the tenant on the landlords’ claim for express indemnity, finding that the tenant’s lease only required the tenant to indemnify the landlords for injuries incurred within the tenant’s dental office. The landlords appealed and contended that the indemnity provision in the tenant’s lease was broad enough to cover accidents in the stairwell of the building.

The indemnification clause in the lease provided:

“8.7 Indemnity. Except for Lessor’s gross negligence or willful misconduct, Lessee shall indemnify, protect, defend and hold harmless the Premises, Lessor and its agents, Lessor’s master or ground lessor, partners and Lenders, from and against any and all claims, loss of rents and/or damages, liens, judgments, penalties, attorneys’ and consultants’ fees expenses and/or liabilities arising out of, involving or in connection with, the use and/or occupancy of the Premises by Lessee. If any action or proceeding is brought against Lessor by reason of any of the foregoing matters, Lessee shall upon notice defend the same at Lessee’s expense by counsel reasonably satisfactory to Lessor and Lessor shall cooperate with Lessee in such defense. Lessor need not have first paid any such claim in order to be defended or indemnified.” (Emphasis added.)

The lease included a limited definition of the term “Premises,” which did not include “stairwells,” so the success of the landlords’ claim depended on the court’s interpretation of the phrase “arising out of.” The landlords cited several insurance cases that showed the phrase should be broadly construed in favor of the promisee (the landlords). The landlords argued that when the phrase was broadly construed, it was extensive enough to include the carpet cleaner’s injuries because, as the landlord’s contended, “[w]ere it not for [the tenant’s] use of the leased premises to operate his dental office, including his hiring of [the carpet cleaner] to clean the carpet within the leased premises, [the employee] would not have been ascending the stairwell and would not have been injured.”

The Court of Appeal rejected the landlords’ argument on the basis that the rules for interpreting indemnification provisions vary significantly between insurance contracts and other types of contracts, including leases. The court relied on a 2008 California Supreme Court ruling that indemnification provisions in non-insurance cases must be “particularly clear and explicit” and will be “construed strictly against the indemnitee.”

The Court of Appeal considered two similar cases, Hollander v. Wilson Estate Co.[ii] and City of Oakland v. Oakland etc. Sch. Distr.,[iii] in its analysis of whether the phrase “arising out of” was broad enough to include the stairwell. In Hollander, a tenant and a third party were injured when an elevator suddenly dropped to the basement. The tenant’s lease required the tenant to indemnify the landlord for claims “arising… in or about or connected with… the demised premises.” The California Supreme Court held that although the elevator was “in a remote sense… a means of ‘connection’ between the street and the demised premises,” the elevator was “owned, controlled, operated and maintained exclusively by the [landlord]” and could “hardly be supposed to have been a subject within the scope of the lease.” In City of Oakland, an indemnity clause required a tenant to indemnify its landlord for claims “arising out of the use and occupation of the premises by the [tenant].” The California Court of Appeal held that the indemnity provision did not apply when a third party was injured after stepping into a hole in a walkway used for ingress and egress to and from the tenant’s premises.

In Morlin Asset Management LP, the landlords tried to distinguish the injury to the carpet cleaner from the injuries in Hollander and City of Oakland. The landlords claimed the injuries in Hollander and City of Oakland were each caused by the negligence of the respective landlord, while the injury to the carpet cleaner was caused by the carpet cleaner’s own negligence (the evidence showed he had spilled soapy water on the stairs), as well as the carpet cleaning company’s negligent supervision of the employee, and the dentist’s negligence for failing to notify the building about the carpet cleaning. However, the court was not persuaded by the landlords’ distinctions, and ruled that the scope of the indemnification provision was an issue of contract interpretation that was not affected by the cause of the injury.

The Court of Appeal ultimately held that the indemnity provision in the lease was not broad enough to include the carpet cleaner’s injuries in the stairwell. The court explained that “[i]t does not matter that the accident would not have happened but for the tenant hiring the third party to clean the carpets in the dental suite, and that the third party may have been at fault. The connection between the tenant’s use of his suite and the accident in the stairwell over which the tenant had no control is too remote to have been within the contemplation of the parties when they entered into the lease.”

The Court of Appeal’s decision in Morlin Asset Management LP shows that boilerplate indemnity language may not cover all of the events that landlords and tenants expect the language to cover. Landlords and tenants should review their indemnity provisions to ensure that the clauses accurately reflect the parties’ intent concerning indemnification.

[i] Morlin Asset Mgmt. LP v. Murachanian, No. B259800 (Cal. Ct. App. Aug. 8, 2016).
[ii] Hollander v. Wilson Estate Co., 214 Cal. 582 (1932).
[iii] City of Oakland v. Oakland Unified Sch. Dist. of Alameda Cty., 141 Cal. App. 2d 733 (1956).

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