Exculpatory Clauses

What tenants should watch for

The cap and its carve-outs

The clause should limit, not eliminate, landlord liability. Outright exculpation is overbroad; tenant should accept a cap, not a release.

• Affiliated parties (owners, members, managers, employees) can be exculpated; the landlord entity itself should not be.
• Define what counts as the “Landlord’s interest in the property” broadly. It should include not only the bare equity in the property but also rental stream, insurance proceeds, condemnation proceeds, and net sale proceeds. Avoid “equity”-only formulations (although the tenant may have to recognize a superior mortgage lender’s interest).
• Carve out the categories of landlord conduct that should never be subject to the cap: (i) gross negligence, intentional misconduct, or criminal acts; (ii) landlord’s insurance and indemnity obligations; (iii) landlord’s express representations and warranties; and (iv) any other obligations where the tenant has bargained for direct landlord performance (e.g., build-to-suit warranties, environmental indemnities).
• Avoid “notwithstanding anything in this Lease to the contrary” language in the exculpation clause if there are other lease provisions where the parties have agreed the cap should not apply.
• Watch the bleed-over into other clauses: a broadly drafted exculpation will swallow the landlord’s representations, indemnity, and warranties unless the carve-outs are explicit.
• Confirm the clause does not affect tenant’s rights under law as landlord’s creditor (e.g., to recover from a third party after a preferential or fraudulent transfer).

Example carve-outs to insist on

• “Landlord’s interest in the Building shall include rents paid by tenants, insurance proceeds, condemnation proceeds, and proceeds from the sale of the Building.”
• “The foregoing does not limit any liability associated with (i) Landlord’s insurance and indemnity obligations; (ii) Landlord’s gross negligence, intentional, or criminal acts; or (iii) Landlord’s representations and warranties.”

Releases, waivers, and indemnity

Distinguish the waiver or release from the indemnity. The tenant may accept a release of Landlord’s own negligence where the released risk is insured, because the release principally shifts the loss to insurance; the tenant should resist indemnifying Landlord for Landlord’s own negligence. The waiver and release also should not apply to any loss actually insured by Landlord, because tenants fund Landlord’s premiums, at least in part, through pass-throughs.

Gross-negligence carve-outs. A gross-negligence carve-out standing alone has limited practical value, because a court would be hard pressed to enforce a release against outrageous landlord conduct in any event. A stronger negotiated compromise makes Landlord liable where Landlord fails to take corrective action within a reasonable time after receiving notice of a condition requiring correction; keying liability to actual notice yields greater certainty.

Do not rely on a court to strike a negligence release. Exculpatory clauses releasing a landlord from liability for its own negligence are enforceable in commercial leases in all but three states (Louisiana, Montana, and Virginia), provided the parties held reasonably balanced bargaining power and the clause is conspicuous and unambiguous; some states also require an express reference to negligence. Landlord-side model clauses pair the negligence release with a sole-recourse provision directing the tenant to its own required insurance. Negotiate the carve-outs rather than assuming unenforceability.

Adjacent traps

Rent abatement. Because the covenant to pay rent is ordinarily independent of Landlord’s performance, a liability cap without a corresponding express abatement right can leave the tenant paying full rent for unusable premises while pursuing a capped claim. Negotiate an express right to abate rent when the premises are rendered unusable by Landlord’s breach or by force majeure events.

Shortened claim periods. Watch for a clause contractually shortening the period within which the tenant may commence an action or interpose a defense arising out of the lease. Landlord-side drafting guidance recommends these provisions precisely because statutory limitations periods for contract claims outlast typical disputes, and shortened periods are enforceable in nearly every state unless the period is unreasonably short or the waiver was not knowing. Resist the clause, or insist on mutuality and a period long enough to permit discovery of latent claims such as operating-expense reconciliation errors.

Scrutinize delivery-of-possession exculpations. Landlord-side model clauses provide that late delivery imposes no liability on the landlord for any reason, keep the lease in force, and waive the tenant’s statutory rescission rights and delay damages, while reserving to the landlord an option to nullify the tenant’s negotiated termination right by paying modest per-diem liquidated damages. Negotiate a firm outside delivery date with an automatic termination backstop, and preserve delay damages or rent credits sized to the tenant’s actual holdover, storage, and re-brokerage exposure.