Can a Lease Include a Provision for Defense and Indemnity?
In the recent California appellate decision in Gumarang v. Braemer on Raymond, LLC, the Plaintiff and cross-defendant Allan Gumarang appealed the trial court’s order granting in part and denying in part his special motion to strike.
In 2016, Lessor and Gumarang executed a “Standard Multi-Tenant Shopping Center Lease” (Lease) through which Lessor agreed to lease to Gumarang commercial property (Property) in Pasadena for seven years.
Gumarang intended to use the Property to operate an ice cream parlor. Gumarang personally guaranteed the Lease.
Several provisions of the Lease address the parties’ respective rights and obligations. Under Paragraph 7.2, Lessor must, among other things, “keep in good order, condition and repair the foundations, exterior walls, structural condition of interior bearing walls, exterior roof, fire sprinkler system, Common Area fire alarm and/or smoke detection systems, fire hydrants, parking lots, walkways, parkways, driveways, landscaping, fences, signs and utility systems serving the Common Areas . . . .”
Paragraph 8.2 requires Gumarang to obtain general liability insurance with a minimum coverage limit of $1,000,000 to protect himself and Lessor against “claims for bodily injury, personal injury and property damage based upon or arising out of the ownership, use, occupancy or maintenance” of the property.
Paragraph 8.7 of the Lease, entitled “Indemnity,” provides: “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.”
Paragraph 8.8, entitled “Exemption of Lessor and its Agents from Liability,” states that notwithstanding Lessor’s or its agents’ negligence or breach of the Lease, neither Lessor nor its agents could be held liable for any injury or loss arising on or from the property, including damage or injury caused by fire.
Instead, Paragraph 8.8 provides, Gumarang’s “sole recourse in the event of such damages or injury [shall] be to file a claim on the insurance policy(ies) that [Gumarang] is required to maintain pursuant to the provisions of Paragraph 8.”
In February 2017, after spending approximately eight months renovating the Property, Gumarang opened his ice cream parlor.
In October 2017, a fire destroyed the Property.
The Pasadena Fire Department investigated the fire and later released an investigation report.
According to the report, the fire originated in the Property’s rear storage room. There were no “fire stops” in the walls of that room, and the Property did not have functioning fire protection or alarm systems.
The report concluded that the fire was accidental and most likely caused by “a non-specific electrical failure within an interior wall of the structure.”
In March 2020, Gumarang filed his lawsuit, and, he filed a second amended complaint against Lessor, Management, and others to recover damages stemming from the fire that destroyed the Property.
Against Lessor and Management, Gumarang asserted causes of action for breach of contract, negligence, breach of the implied covenant of good faith and fair dealing, breach of fiduciary duty, negligent misrepresentation, and violations of Business and Professions Code section 17200 et seq.
Gumarang alleged that Lessor and Management failed to ensure the Property was equipped with, among other things, electrical and fire prevention systems that were in good working condition, which caused the fire that destroyed the Property.
Gumarang also alleged that Management failed to notify him that the Property lacked adequate electrical wiring and fire prevention systems before he executed the Lease.
In February 2021, counsel for Lessor and Management sent Gumarang a letter demanding that he “defend and indemnify them and their agents . . . as required under the terms and conditions of the [Lease]” and to place his insurance “carrier on notice of this claim.”
Gumarang’s counsel later denied Lessor and Management’s request, claiming, among other things, that the Lease’s indemnity clause applied only to claims brought by third parties.
In August 2021, Lessor and Management filed a cross- complaint against Gumarang, as well as other individuals and entities not party to this appeal.
Lessor and Management’s cross-claims for contractual indemnity, breach of contract, and declaratory relief all arise out of allegations that Gumarang agreed to defend and indemnify Lessor and its agents, including Management, against any claims arising out of his use or occupancy of the Property when he signed the Lease.
In mid-September 2021, Gumarang’s insurance carrier notified counsel for Lessor and Management that it would defend Lessor, but not Management, against the claims raised in Gumarang’s lawsuit because only Lessor was named as an insured in Gumarang’s insurance policy.
The parties do not dispute that Management’s cross-claims for contractual indemnity, breach of contract, and declaratory relief concerning Gumarang’s obligations under the Lease’s indemnity provision are all premised on common factual allegations. The parties disagree, however, on what those common allegations are.
According to Gumarang, Management’s cross-claims arise out of his protected activity of suing Management to recover damages from the destruction of the Property.
Management, on the other hand, asserts that the cross-claims arise out of Gumarang’s nonprotected activity of breaching the Lease’s indemnity provision by refusing to defend and indemnify Management against any claims, losses, or damages arising out of his use or occupancy of the Property, including the damages to the Property at issue in Gumarang’s lawsuit.
A claim for contractual indemnity is akin to a claim for breach of contract.
Thus, a claim for contractual indemnity and breach of contract based on a refusal to honor an indemnity provision consist of the same elements: (1) the existence of an agreement containing a contractual indemnity provision; (2) the indemnitee’s performance of the relevant provisions of the agreement; (3) a loss within the meaning of the indemnity agreement; and (4) damages sustained as a result of the breach of the indemnity agreement.
Here, Gumarang’s breach of Paragraph 8.7 of the Lease, which Management claimed requires him to defend and indemnify Management against any losses or damages arising out of his use or occupancy of the Property, constituted the wrongful conduct alleged in the challenged cross-claims.
Specifically, Management alleges that Gumarang agreed to be bound by Paragraph 8.7 when he signed the Lease.
In this case, it was not Gumarang’s filing of the underlying lawsuit that forms the basis of Management’s cross- claims for contractual indemnity, breach of contract, and declaratory relief.
Rather, it was Gumarang’s alleged breach of the Lease’s indemnity provision by refusing to defend and indemnify Management against claims arising out of Gumarang’s use or occupancy of the Property that gave rise to those claims.
LESSONS:
1. A lease should be carefully reviewed to determine if there are any indemnity provisions, what triggers the right to indemnity, and which party is entitled to indemnity.
2. Coverage under an insurance policy requires that a party seeking policy benefits is an insured, and a lessor should require a lessee to name the lessor as an additional insured party under the lessee’s policy.
3. A claim for contractual indemnity is akin to a claim for breach of contract.
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