§ 20A.04 Specific Leasing Issues in Sale-Leaseback Net Leases

• Jurisdiction: United States
• Publication year: 2022

§ 20A.04 Specific Leasing Issues in Sale-Leaseback Net Leases

[1]—Exculpation and Indemnity

Sale-leaseback net leases almost always include very broad exculpation and indemnity provisions that release and indemnify the buyer-landlord from any events occurring at the real property, including events occurring before the buyer-landlord's purchase of the property. Both exculpation and indemnity provisions can be seen as putting the buyer-landlord in a similar position to a mortgage lender. Because (1) the buyer-landlord has few, if any, management rights or obligations, or physical presence, at the real property, and (2) the seller-tenant was the owner before the sale-leaseback transaction the buyer-landlord requires full protection¹ from any costs or liabilities associated with the site, including those caused by any action or omission before the buyer-landlord's purchase of the site from the seller-tenant, and any condition at the site, even if such conditions were not caused by the seller-tenant, in each case with only very limited exceptions. The following sample provision is largely favorable to the buyer-landlord, although the footnotes discuss points that are sometimes negotiated between the parties.

EXCULPATION AND INDEMNITY CLAUSE2

[___] Exculpation. To the extent not prohibited by applicable law, none of the Landlord Parties³ shall be liable for, under any circumstances, and Tenant hereby releases all Landlord Parties from, any Losses of Tenant, Tenant's members, officers, directors, shareholders, agents, employees, contractors, customers, invitees, or any other Person in or about the Property, whether the same are caused by (a) fire, explosion, falling plaster, steam, dampness, electricity, gas, water, rain; (b) breakage, leakage or other defects of the Tenant's Equipment,⁴ Building Equipment,⁵ sprinklers, wires, appliances, plumbing, fixtures, water or gas pipes, roof, air conditioning, lighting fixtures, street improvements, or subsurface improvements; (c) theft, acts of God, national or local disease outbreak or public health threat (including, without limitation, related to the COVID-19 virus and any variant thereof), acts of the public enemy, riot, strike, insurrection, civil unrest, war, court order, requisition or order of governmental body or authority; (d) any act or omission of any other occupant of the Property; (e) operations in construction of any private, public or quasi-public work; (f) Landlord's reentering and taking possession of the Property in accordance with the provisions of this Lease or removing and storing the property of Tenant as herein provided; or (g) any other cause, including damage or injury that arises from the condition of the Property, from occupants of adjacent property, from the public, or from any other sources or places, and regardless of whether the cause of such damage or injury or the means of repairing the same are inaccessible to Tenant, or that may arise through repair, alteration or maintenance of any part of the Property or failure to make any such repair, from any condition or defect in, on or about the Property including any Environmental Conditions⁶ or the presence of any mold or any other Hazardous Materials, or, from any other condition or cause whatsoever; provided, however, that the foregoing release set forth in this Section [___] shall not be applicable to any claim against a Landlord Party to the extent, and only to the extent, that such claim is directly attributable to the gross negligence or willful misconduct of such Landlord Party, as determined by a final nonappealable judgment (or by a judgment that such Landlord Party elects not to appeal) by a court of competent jurisdiction⁷ (provided, however, that the term "gross negligence" shall not include gross negligence imputed as a matter of law to Landlord solely by reason of its interest in the Property or the failure to act by Landlord or anyone acting under its direction or control or on its behalf, in respect of matters that are or were the obligation of Tenant under this Lease). Without limiting the foregoing, Tenant hereby waives any right to any consequential, indirect or punitive damages against any Landlord Parties arising out of any claim in connection with or related to this Lease or the Property.⁸

[___] Indemnity. In addition to any and all other obligations of Tenant under this Lease (including under any indemnity or similar provision set forth herein), to the extent permitted by applicable Law, Tenant hereby agrees to fully and forever indemnify, protect, defend (with counsel selected by Landlord)⁹ and hold all Landlord Parties free and harmless of, from and against any and Losses (including, subject to the terms of this Section, diminution in the value of the Property¹⁰ ): (a) arising out of or in any way related to or resulting directly or indirectly from: (i) the use, occupancy, or activities of Tenant, its subtenants, agents, employees, contractors or invitees in or about any of the Property; (ii) any failure on the part of Tenant to comply with any applicable law, including any Environmental Laws; (iii) any Default or Event of Default under this Lease or any breach or default by Tenant or any other party (other than Landlord) under any other Transaction Document (including as a result of any termination by Landlord, following an Event of Default, of any sublease, license, concession, or other consensual arrangement for possession entered into by Tenant and affecting any of the Property pursuant to Section [___]), and including any additional fees and costs, or any increased interest rate or other charges imposed by any Landlord's Lender by reason of such Default or Event of Default (whether or not such Default or Event of Default is a default under any agreements with any Landlord's Lender); (iv) any other loss, injury or damage described in Section [___] above titled "Exculpation"; (v) in connection with mold at the Property; (vi) work or labor performed, materials or supplies furnished to or at the request of Tenant or in connection with obligations incurred by or performance of any work done for the account of Tenant in, on or about the Property; and (b) whether heretofore now existing or hereafter arising out of or in any way related to or resulting directly or indirectly from the presence or Release at, on, under, to or from the Property of Hazardous Materials. Without limiting the foregoing, (x) the indemnity set forth in this Section [___] includes direct or indirect compensatory, consequential, and punitive damages¹¹ , (y) Tenant shall pay on demand all fees and costs of Landlord (including attorneys' fees and costs) in connection with any enforcement by Landlord of the terms of this Lease and any amendment to this Lease requested by Tenant, and (z) all of the personal or any other property of Tenant kept or stored at, on or about the Property shall be kept or stored at the sole risk of Tenant.

Notwithstanding the foregoing, the obligations of Tenant to indemnify, protect, defend and hold harmless Landlord Parties as set forth in this Section [___] shall not be applicable to any Losses of any Landlord Party to the extent, and only to the extent, that such Losses are directly attributable to the gross negligence or willful misconduct of such Landlord Party, as determined by a final nonappealable judgment (or by a judgment that such Landlord Party elects not to appeal) by a court of competent jurisdiction (provided, however, that the term "gross negligence" shall not include gross negligence imputed as a matter of law to Landlord solely by reason of its interest in the Property or the failure to act by Landlord or anyone acting under its direction or control or on its behalf, in respect of matters that are or were the obligation of Tenant under this Lease).¹²

[___] Survival; Waivers. The provisions of this Article [___] shall survive the expiration or sooner termination of this Lease. Tenant hereby waives the provisions of any applicable Law restricting the release of claims, or extent of release of claims, that Tenant does not know or suspect to exist at the time of release, that, if known, would have materially affected Tenant's decision to agree to the release contained in this Article [___]. In this regard, Tenant hereby agrees, represents, and warrants to Landlord that Tenant realizes and acknowledges that factual matters now unknown to Tenant may hereafter give rise to Losses that are presently unknown, unanticipated and unsuspected, and Tenant further agrees, represents and warrants that the release provided hereunder has been negotiated and agreed upon in light of that realization and that Tenant nevertheless hereby intends to release, discharge and acquit the parties set forth herein above from any such unknown Losses that are in any manner set forth in or related to this Lease, the Property and all dealings in connection therewith.

⁶ This indemnity covers liabilities related to environmental issues at the Property, and therefore overlaps somewhat with the environmental indemnity contained in § 20A.04[14] infra.

⁷ Although the general exclusion for gross negligence and willful misconduct is relatively standard, some seller-tenants will try to change this language slightly so that the gross negligence or willful misconduct of any Landlord Party eliminates the exculpation for the applicable claim for all Landlord Parties, and not just the Landlord Party that was grossly negligent or committed willful misconduct.

⁸ Seller-tenants often ask for this waiver of consequential and related damages to be reciprocal.

⁹ The procedures for indemnification are highly dependent on the specific transaction and the parties. Some sale-leaseback net leases contain lengthy provisions regarding the submission of indemnity claims, selection and approval of counsel, settlements, and related issues. These expanded provisions are in many ways similar to indemnity provisions in...