Enforcing Subrogation Waivers in Commercial Leases

February 25, 2014

Subrogation, the equitable remedy available to insurers to seek compensation for payments to an insured as a result of loss caused another party’s negligence or other misconduct, factors into most commercial leases. In many cases, the parties each agree to waive subrogation rights, and these waivers are almost always enforceable. Despite the best efforts of a sublessee’s insurer, the sublease’s subrogation waiver proved no exception to that rule when the New Jersey Appellate Division issued its decision in Federal Insurance Company v. Hartz Mountain Associates.

The case centered around the terms of a lease between a commercial sublessee, AFD Contract Furniture, Inc., and sublessor, Crest Haulage, Inc. Crest had, with permission from its landlord, Hartz Mountain Associates, subleased a warehouse space property to AFD. The lease between Crest and Hartz required both the landlord and tenant to obtain insurance and also included mutual waivers of subrogation. AFD’s sublease agreement with Crest included a provision stating that it was subordinate to the Hartz-Crest lease and incorporated all of that lease’s terms by reference.

Two years later, a fire struck AFD’s space, causing more than $400,000 in damages to the furniture company. AFD’s insurer sued Crest and Hartz for negligence and breach of contract, arguing that a faulty light bulb caused the fire. The insurer claimed that an exception within the subrogation waiver for the sublessor’s acts of negligence made the agreement’s terms ambiguous and should allow the sublessee’s insurer to proceed to trial.

The court did not agree, concluding that the terms of the waiver were clear and unambiguous. The provision regarding acts of negligence, upon which AFD’s insurer pinned much of its case, did not save the day. That language, the court explained, was a unilateral term for the benefit of the landlord, Hartz, to protect it from negligence-based claims brought by third-parties.

The waiver’s language made it plain that the landlord and the tenant intended, and agreed, to release each other from claims against one another. The waiver also extended to subrogees that might step into either party’s shoes. By signing a sublease that incorporated all of the Hartz-Crest lease’s terms by reference, including the release and subrogation waiver, AFD became bound by that same language.

Negotiating commercial leases are often complex processes, especially if they involve a sublease tied to a superior lease. It is vital to understand all of the terms of both the sublease and superior lease agreements in order to weigh the terms of the proposed deal and make a fully informed decision. This process often requires the aid of a capable, experienced legal advisor to help you dissect your business’s rights and obligations under your agreement. To get the help you need assessing the terms of a proposed lease or sublease, talk to the real estate attorneys at Samuel C. Berger, P.C. Our New Jersey real estate attorneys can help steer you through the process of completing your lease or sublease to ensure the agreement you sign is the deal your business desired. Reach us online or call (201) 587-1500 or (212) 380-8117.

Contact us through our website or call to schedule your free, confidential initial consultation today.

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