Every commercial lease in New South Wales involves an allocation of risk. Landlords want to protect the value of their asset and avoid being exposed to a tenant’s activities. Tenants want to safeguard their business while limiting liability for events outside their control.
The tools for managing this balance are insurance and indemnity clauses. These provisions often sit near the back of a lease, but they carry some of the most serious financial consequences if something goes wrong.
Insurance Responsibilities
Commercial leases usually divide insurance obligations between landlord and tenant.
Landlord’s insurance typically covers the building itself, along with fixtures and sometimes loss of rent if the premises become uninhabitable.
Tenant’s insurance generally covers business contents, stock, fit-out, and public liability for accidents that occur within the leased area.
The lease will often specify minimum coverage levels and require certificates of currency to be provided. Failure to maintain insurance can constitute a breach of lease, and may give the landlord rights to terminate the lease if not remedied.
Indemnity Clauses
Indemnity clauses are designed to shift risk from landlord to tenant. They usually require the tenant to “indemnify the landlord against all loss, damage, claims or liability arising out of the tenant’s use of the premises.”
Courts interpret indemnities strictly but will enforce them according to their terms. Unless carefully drafted, tenants may find themselves liable for losses caused indirectly or by third parties over whom they have little control. Indemnities can be broad, and it is essential to obtain legal advice when considering giving or accepting an indemnity.
Common Issues in Practice
Overlap with insurance
Leases sometimes require tenants to indemnify landlords even for risks already covered by the landlord’s own insurance. This can result in double protection for the landlord and unexpected liability for the tenant.
Exclusion of negligence
Some leases go further, requiring tenants to indemnify landlords even for losses caused by the landlord’s own negligence. Courts will uphold such clauses in a commercial context if the wording is clear, though they are often heavily negotiated.
Unclear drafting
Broad wording like “all claims whatsoever” can be challenged for uncertainty, but tenants rarely want to test this in litigation. Clearer drafting benefits both parties and avoids the need for litigation.
Negotiation Points
For tenants:
Ensure indemnities are limited to losses within your control.
Avoid indemnities that extend to the landlord’s negligence.
Check for consistency between indemnity and insurance obligations - you don’t want to indemnify for something which cannot be insured and which is outside of your control.
For landlords:
Maintain control over building insurance and require tenants to provide proof of their own cover.
Use indemnities to protect against risks arising from the tenant’s occupation.
Draft with precision: overly broad clauses are more likely to be challenged.
Conclusion
Insurance and indemnity provisions are not boilerplate clauses. They dictate how risk is shared between landlord and tenant and can determine who bears the cost when things go wrong.
For landlords, they are an essential safeguard for the property. For tenants, they can represent hidden liabilities if not reviewed carefully.
As with all parts of a commercial lease, the key is clarity. Well-drafted insurance and indemnity clauses protect both parties, reduce disputes, and ensure that risks are borne by the party best placed to manage them.
Understanding the insurance and indemnity provisions in your commercial lease is a vital component of managing risk and responsibly structuring your tenancy. To deepen your understanding of how these clauses interplay with other major lease issues, you may also wish to review our related guides:
Together, these resources will help you form a comprehensive view of how insurance and indemnities fit into the broader legal and practical framework of commercial leasing in New South Wales.
Our property law specialists can help you
At Thornton + King our Law Society Accredited Specialist Property Lawyers have decades of experience advising clients in relation to insurance requirements and the effects of indemnities in commercial leases. To speak to a specialist commercial leasing lawyer in relation to your commercial property lease, give us a call or submit an enquiry now.
