Indemnity clauses in commercial leases and what to check before you sign

You have just received the draft lease for your new premises. You check the rent, the term, the option to renew and the fitout contribution, and then you reach the clause headed "indemnity". It runs for several lines of dense wording about loss, damage, claims and costs, and it is tempting to treat it as boilerplate that every landlord's standard form contains. In most leases it is the clause that decides who pays when something goes wrong, so it deserves more than a skim before you sign.

An indemnity in a commercial lease is a contractual promise by one party, usually the tenant, to make good the landlord's loss, damage, liability, costs or expenses in the situations the clause describes. It is a promise to pay, not merely a statement about who is at fault. Because it is a promise, the landlord may be able to claim under it without first proving that you breached the lease or that the loss was foreseeable in the way an ordinary damages claim would require. That is why the wording matters far more than most tenants assume, and why the clause needs to be read against the repair, insurance, fitout and make good provisions around it.

The parts of the indemnity to read before you sign

An indemnity clause is really a bundle of separate drafting choices: what triggers it, whose conduct it catches, what it covers, what it excludes, and how long it lasts. Each choice shifts risk in a different direction. The sections below walk through the components you will find in a typical lease, in roughly the order their commercial weight dictates.

What triggers the indemnity

The trigger is the sentence that says when the promise to pay is engaged. It is the most important part of the clause, and landlords and tenants usually disagree about it most. The narrow version ties the indemnity to loss "caused by" the tenant's act or omission. The broad version applies to any loss "arising out of or in connection with" the tenant's use or occupation of the premises, and sometimes adds "whether or not the landlord or any other person contributed to the loss":

Caused by: ties the promise to your wrongful act or omission. This is the tenant-friendly trigger.
In connection with: catches loss that is merely associated with your occupation, even if you did not cause it.
Arising out of / associated with: similar breadth, and often paired with a list of everyone connected to your business.
Whether or not contributed to: the landlord's standard push, because it removes any need to work out who actually caused the loss.

The trap with broad triggers is that they can make your business pay for loss caused by the landlord's contractors, another tenant, or a structural defect in the building. If the wording does not tie the indemnity to fault, the connection alone may be enough.

Whose conduct is caught

Most indemnities extend beyond your own acts to the conduct of people connected with your business. The reach of that list determines how much of the landlord's risk you are carrying:

Your own acts and omissions: expected, and hard to argue with.
Employees and agents: usual, and generally within your control.
Independent contractors: worth checking. Some clauses make you answer for your contractors' work, so confirm they carry their own insurance and that the indemnity does not silently pick up their mistakes.
Customers, suppliers and invitees: the exposure that makes broad indemnities expensive for foot-traffic businesses such as retail, hospitality, childcare and health services.
Subtenants and assignees: check whether the indemnity follows the premises if you sublet or assign, and whether the incoming occupant is required to give their own indemnity to the landlord.

What losses and costs are covered

The second major drafting choice is the list of what the tenant must pay for. Some clauses stop at property damage and personal injury. Others sweep in every category of loss a lawyer can name, and the list often escalates in the final draft:

Property damage and personal injury: the core of any indemnity.
Economic and consequential loss: can include rent the landlord loses while premises are unusable, and other indirect losses that flow from an incident.
Legal costs on an indemnity basis: more expensive than the ordinary party-party costs a court would award, and a common escalation in landlord drafting.
Insurance excess and uninsured amounts: whether you wear the landlord's policy excess and any gap between the claim and the cover.
Investigation, reinstatement and enforcement costs: remediation, expert reports and recovery expenses, which can exceed the underlying loss.

Whether the landlord's own fault is carved out

Courts construe indemnity clauses strictly, in the context of the contract as a whole (BI (Contracting) Pty Ltd v AW Baulderstone Holdings Pty Ltd [2007] NSWCA 173). Following the approach long associated with Canada Steamship Lines Ltd v The King [1952] AC 192, an indemnity will not generally be read to cover the indemnified party's own negligence unless the clause says so in clear terms. That principle helps tenants, but only so far: an expressly drafted clause can still shift the landlord's own negligence onto you, so the carve-out needs to be negotiated, not assumed.

The carve-out tenants should ask for is straightforward: the indemnity does not apply to loss caused by the landlord's negligence, breach of the lease, failure to repair or maintain, or unlawful conduct. If the landlord controls the roof, the structure, the common areas and the essential services, the clause should not make your business pay when those fail.

Caps and limits

Many leases contain no monetary cap on the tenant's indemnity, which leaves exposure open-ended for businesses with customer-facing premises, kitchens, plant, heavy equipment or warehouses. Landlords resist hard caps, but there are intermediate positions worth negotiating:

A monetary cap: expressed as a dollar figure or tied to a multiple of the required insurance cover.
An insurance-matching limit: the indemnity applies only up to amounts recoverable under the policies the lease requires you to hold, except for deliberate misconduct or fraud.
Exclusion of indirect or speculative loss: keeps remote losses out of the promise.
A reasonableness threshold on legal costs: limits recovery to costs reasonably and properly incurred.
A duty on the landlord to mitigate: prevents the landlord from letting a small problem become a large claim.

How the indemnity meets the insurance clause

The indemnity and the insurance clause are two halves of the same risk allocation, and they are often drafted by different people. If they do not line up, your business carries the gap. Most commercial leases require the tenant to hold public liability insurance for a specified sum, and the figure in the lease needs to match what you actually hold:

Public liability minimums: commonly set at ten or twenty million dollars; confirm the number and that your policy responds at that level.
Policy scope: contents, stock, plate glass, machinery and business interruption cover are each separate decisions, and specialist operations such as food service, health and childcare carry their own exclusions.
Contractor insurance: whether your contractors must hold their own cover and note the landlord on it.
Landlord noted on the policy: whether the lease requires the landlord to be named as an interested party or principal.
Exclusions: the recurring problem is an indemnity that is wider than the policy, so that the uninsured portion sits with your business.

Whether it survives the end of the lease

Survival clauses state that the indemnity continues after the lease expires or is terminated. They are common and commercially reasonable, but the drafting should limit them to claims that genuinely relate to your period of occupation or your obligations under the lease. Without that limit, disputes can surface years after you vacate, usually around make good, contamination allegations, latent damage or contractor work done near the end of the term. Check whether the clause has a cut-off date for notification of claims, and push for one if it does not.

Fitout, alterations and make good

Fitout and make good clauses usually carry their own indemnity language, separate from the general indemnity. If you are installing signage, cabling, cool rooms, kitchen equipment, partitions or machinery, the landlord may require you to indemnify it against damage to the building, the common services or third parties arising from the works:

Approval of works: who approves the drawings, the contractors and the timing.
Ownership of the fitout: who owns it during the term and after it ends.
Contractor damage: who bears the risk of damage to base building services during installation.
Adequacy of base building services: whether the landlord warrants that power, water, air conditioning and fire services are sufficient for your use.
How make good is measured: at the end of the term, whether you must reinstate the premises or simply leave them in a defined condition.

Vague drafting in this area produces expensive disputes after your business has already committed to the premises, so the allocation needs to be settled before fitout work starts.

The guarantor's indemnity

Where the lease is supported by a guarantee, the guarantor's document usually contains its own indemnity running parallel to the tenant's obligations. For a director or parent company signing as guarantor, that means the indemnity can be enforced against them personally if the tenant does not pay. Check that the guarantor's indemnity is no wider than the tenant's, and that it ends at the same time, unless the lease expressly extends it to a new term or a new tenant.

The retail lease overlay

Retail premises add a layer of state legislation that shapes what the landlord can enforce. In New South Wales, the Retail Leases Act 1994 (NSW) (the Act) operates despite the terms of the lease: under s 7 of the Act, a lease provision is void to the extent it is inconsistent with the Act. The Act also requires the lessor to give a disclosure statement at least seven days before a retail shop lease is entered into (s 11), and restricts recovery of outgoings to amounts the lease specifies and the disclosure statement disclosed (s 22), with costs of advertising or promotion excluded from outgoings altogether.

The other states and territories run their own retail leasing regimes with similar themes, so the local Act always needs to be checked. The retail overlay does not usually police indemnity wording directly, but it affects how far related clauses, such as outgoings, disclosure and costs, can operate, and it gives tenants statutory levers that do not exist in a purely commercial lease.

Optional clauses worth asking for

Not every indemnity needs every refinement, but these options are worth raising where they fit your business:

Monetary cap: worth pursuing where your exposure is open-ended, such as hospitality, manufacturing, warehousing or heavy equipment operations.
Landlord fault carve-out: worth insisting on where the landlord controls the base building, common areas and essential services.
Insurance-matching limit: worth asking for wherever the lease already requires you to insure, so that the indemnity does not exceed your cover.
Subrogation waiver: prevents the landlord's insurer from paying a claim and then pursuing your business in the landlord's name.
Survival cut-off: a defined period after expiry for notifying claims, so latent damage or contamination disputes cannot surface without limit.

How an Artificer Legal practitioner reviews an indemnity clause

An indemnity clause is reviewed in a particular order, because each drafting choice depends on the ones before it. An Artificer Legal practitioner would start by mapping the trigger, the list of covered losses and the carve-outs, then test the indemnity against the insurance, repair, fitout and make good clauses, and only then turn to caps, survival and the guarantor's exposure. The clauses we push back on first are the "whether or not the landlord contributed" trigger, the full-indemnity-basis costs language, and any indemnity wider than the insurance the lease requires you to hold. Where retail premises are involved, we would also check the disclosure statement and the local retail leasing Act, because the Act can override lease terms that the landlord assumed were enforceable.

For leases already signed, the same analysis identifies your actual exposure and the options for fixing it, including variations, renewal negotiations or insurance adjustments. The point of the review is the same in both cases: to make sure the promise to pay matches the risks your business genuinely controls.

Why the trigger wording decides who pays

If one drafting choice decides whether an indemnity works in your favour, it is the trigger. A "caused by" trigger keeps the promise inside the risks your business actually controls: your acts, your people, your works. An "in connection with" trigger turns the landlord's loss into your bill even where someone else caused it, and the "whether or not contributed to" version removes the question of cause altogether. Every other refinement, the carve-outs, the caps, the insurance alignment, hangs off that first sentence. Read it first, and if it is not tied to fault, negotiate it before you negotiate anything else.

An indemnity in a commercial lease is a promise to pay that can reach further than ordinary fault-based liability. The components that matter are the trigger wording, the conduct it catches, the losses it covers, the carve-out for the landlord's own fault, the caps and insurance alignment, survival after the term, fitout and make good risks, the guarantor's exposure, and the retail lease regime that applies to the premises. Raise the risk allocation points early, get any agreed position written into the lease or a formal variation, and treat the indemnity as a negotiable allocation of risk rather than standard wording that cannot be changed.