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Off The Hook?

Maybe you don’t know it, but right now in addition to all the other promises you have to make and amounts you have to pay before commencing renovations (see, The New Rules of Renovating), most alteration agreements require you to indemnify your co-op and its directors and shareholders against any damage resulting from the work you did.  It’s just part of the price of having an apartment worthy of Architectural Digest. Say someone got injured and they sue you and the building, the building can sue you right back under the indemnity for the amounts claimed – and you’d likely be on the hook. 

Only maybe not, anymore. At least one court recently struck down an indemnity provision in the alteration agreement of an Upper East Side co-op, saying it was against the law.  What law? General Obligations Law. (Sec. 5-321 for the detail oriented.) Basically, it says that an agreement relating to a lease that exempts the lessor  from liability for damage due to its negligence is void and unenforceable.  Taken to its logical conclusion, it would mean that you can’t indemnify your co-op. The idea is that wrongdoers shouldn’t escape unscathed.

Except the State’s Top Court has said you can, or at least, if two sophisticated business types agree to indemnify the landlord for its own negligence (so long as it’s not 100% negligent) that’s okay, provided they employ insurance to cover the obligation.  That way the landlord isn’t escaping liability to the victim.  The parties are just allocating the risk of liability to third parties with insurance. That’s why up till now, everyone thought it was OK for shareholders to indemnify their co-ops against damage in alteration agreements.

Only now there’s a big question mark because The Second Department (which covers Brooklyn, Queens and Staten Island) has had its own say.  When the board of the Upper East Side co-op got sued, along with the renovating shareholders, by a worker on the project, it told the owners to indemnify it under the alteration agreement.  Nothing doing, the court said.  It’s against The Law. We know what the Top Court said, but the indemnity here is no good – for two reasons. First, it doesn’t make any exception for the co-op’s negligence.  Second, it doesn’t limit the building’s recovery to the insurance proceeds.

In fact, this is not the first time this court has pronounced these rules. Several times before it nixed indemnity provisions for the same reason, but they were between commercial tenants and their landlords, and in at least one case there was no insurance. Only now, those judges have taken aim at the standard indemnity provision found in many existing alteration agreements, causing consternation in many co-op boardrooms.

So what does it all mean? It’s too soon to say whether the current broad indemnity provisions found in lots of alteration agreements, and many proprietary leases,  will hold up or have to be reformulated, limiting the ability of boards and buildings to recover under them.

To read more, see:

  • Hadzihasanovic v. 155 East 72nd Street Corp., 2010 NY Slip Op. 00809, Feb. 2, 2010, App. Div. 2d Dept.
  • Great Northern Ins. Co. v.Interior Const. Corp., 2006 NY Slip Op. 07519, Oct. 19, 2006, Ct. of App.
  • Mendietta v. 333 Fifth Avenue Assn., _ A.D. 3d _, Sept. 15, 2009, App. Div. 2d Dept.
  • Yuen v. 267 Canal Street Corp. 2007 NY Slip Op. 05715, June 26, 2007, App. Div. 2d Dept.
  • Colosi v. RATL, LLC., 2004 NY Slip Op. 03758, May 10, 2004, App. Div. 2d Dept.

To access these cases, click here, then under Search By Citation, enter the case date and number.

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