Hold Harmless Agreements Defined

Hold harmless agreements, also called "hold harmless clauses" or "hold harmless provisions," are a common feature of real estate transactions. A hold harmless agreement essentially is an agreement between parties to a contract in which one party promises not to hold the other party ("indemnitor") liable in the event that the indemnitor breaches the contract. A hold harmless agreement essentially is reciprocal. Both contracting parties agree to hold the other harmless or indemnify them against any loss that they suffer as a result of the actions (or inactions) of the other party to the contract.
In a real estate transaction involving the purchase of property, the seller often has certain duties to the buyer, including the requirement to disclose material defects affecting the property. A hold harmless provision or agreement in the purchase contract may state that the buyer agrees to hold the seller harmless against liability for any defects in the property, notwithstanding that the seller failed to disclose the defect(s) to the buyer prior to purchase.
The rationale for a hold harmless provision like this is that the buyer accepted the risk in agreeing to buy the property "as-is." Although the seller had a duty to disclose material defects, the buyer agreed to buy the property regardless of whether the seller complied with its duty to disclose.
Another common use of hold harmless agreements is in leases of commercial real estate. In a commercial lease, a hold harmless provision is typically included in a provision that requires the tenant to carry insurance during the lease term . A typical hold harmless provision is as follows:
Tenant shall indemnify, hold harmless and defend Landlord from and against all claims arising from: (A) the acts and negligence of Tenant or its employees, agents, contractors, or invitees; (B) the conduct of its business; or (C) any act or omission on or off the Premises, except to the extent caused by the gross negligence or willful misconduct of Landlord or Landlord’s employees, agents, contractors or invitees regarding Landlord’s construction, maintenance or use of Common Facilities; provided, however, that in the event of a claim resulting from the negligence or willful misconduct of Landlord, Landlord shall be solely responsible for the cost of defending said claim and the Tenant’s indemnity obligation shall apply only to costs incurred in the defense of such claim.
The key point being conveyed by the clause above is that the tenant agrees to indemnify the landlord against liability that may arise owing to the negligent acts of the tenant or the tenant’s employees and agents. That way, the landlord is not held responsible in the event that the negligent acts of the tenant gave rise to the claimant’s claims.
However, in the event that the landlord’s gross negligence or willful misconduct caused the tenant’s claims, the landlord is still responsible for the defense thereof, even though the tenant’s negligent acts or omissions arguably contributed to the tenant’s claims.
The above example illustrates that hold harmless agreements can take many forms. From simple forms such as those included with property sale purchase contracts to more complex agreements such as that disclosed above, hold harmless agreements are frequently included as a key provision in real estate transactions.

Common Components of a Real Estate Hold Harmless Agreement

A real estate hold harmless agreement, much like releases, often involves an agreement between a buyer and seller of commercial real estate concerning an as-is sale. The general concept underlying a hold harmless agreement is an acknowledgment by the buyer of the risk that he will not have any recovery if a third party ever successfully pursues a claim against the seller. In many hold harmless agreements, however, the seller expressly or impliedly retains liability for some defined failure of the property. For example, the seller may agree that if after closing, underground tanks for fuel or other contaminants are discovered in the ground, the buyer will bear the costs of clean-up and remediation, but the seller will be solely responsible for removing the tanks.
The usual elements of a hold harmless agreement are: (1) A basic agreement between the parties that if one party or the property is subject to a specific claim or liability, the other party will be responsible for the claim or liability; (2) Provisions that specify what type of claims will be subject to the hold harmless agreement; (3) The duration of the hold harmless agreement; (4) Provisions that detail the process of how an indemnified party may recover against an indemnifying party, including what remedies exist, whether the indemnified party must notify the indemnifying party of a potential claim within a certain period of time, and what must be done to effect an assignment of rights by the buyer to the seller; and (5) The scope of the remedies that exist under the hold harmless agreement, such as an indemnification agreement, a direct right of action by a third party against the indemnifying party who breaches the hold harmless agreement, the right to reimbursement, as well as the common exclusion of incidental or consequential damages.
Beyond these common provisions that appear in most hold harmless agreements, a buyer must also give careful consideration as to what claims are covered by the agreement, whether there is a statute of limitations on the covered claims, and the extent of any carve-outs for general negligence. If a hold harmless agreement is entered into jointly with a release, all parties should understand the distinctions between the two, and how they work together.

Advantages of Using a Hold Harmless Agreement

A hold harmless agreement is not only a way to protect the real estate professional but also the buyer and seller jointly. It profits all parties to have their own written agreement so that each is clear about its obligations in the event of litigation. A hold harmless agreement will spell out that the buyer and seller agree to bear responsibility for their own acts of negligence. In this way, the broker cannot be pursued when neither the buyer nor the seller were acting with negligence. If the actions of the broker are also at play however, there is no guarantee. On the other hand, if the broker has been pure in its conduct, all parties will wish to turn to each other rather than the broker in the event of an issue arising out of the transaction.
A hold harmless agreement can reduce the number of parties involved in an arbitration or litigation proceeding. The legal costs borne by the buyer and the seller can be costly. A hold harmless agreement may also result in a broker receiving defense attorney fees. The same holds true for real estate professionals such as appraisers, lenders, brokers, inspectors, accountants, agents and others. All will benefit from including a hold harmless agreement in the real estate transaction.

Possible Limitations and Disadvantages

While hold harmless agreements are designed to offer protection, they are not infused with magic powers that will ward off every negative consequence. Particularly in the case of bad faith, intentional misconduct or where your actions are provably outside the scope of the indemnity provision, hold harmless agreements do not provide any actual protection. And while courts may try to give effect to provisions. If you disregard them, a hold harmless agreement may be of no utility to you.
Additionally, hold harmless agreements are not bulletproof. Courts have struck down hold harmless agreements that involved certain power imbalances. For instance, in the case of an injury caused by a defective product, courts have held that "permission to be sued" is inadequate to absolve a seller of a defective product. Significantly, the posted ended up relying on the reasoning from a case that predates the enactment of Iowa’s Product Liability Law. The court based its decision on the fact that "[i]t is inconsistent to allow a seller to evade liability to an injured party for a faulty product by a contractual indemnification agreement with an innocent intermediary with whom it had great bargaining power." The court’s reasoning basically involves equity and public policy. We all want products to be safe. If the manufacturer of a product was left with the full burden of liability, the incentive would be to make the product as safe as possible. However, if the manufacturer can indemnify itself from liability, the burden of injuries would fall on someone else, possibly a buyer who has little means to mitigate the risk or a third-party victim with no contractual relationship with the manufacturer. The court felt that distributers should not be allowed to avoid liability under these circumstances. The result is that the Hold Harmless Agreement between the distributor and the retailer or maker of the product does not protect the distributor once the case reaches court.
Calamari v. Long Manufacturing, Inc., 278 N.C. 202 (1971)- Calamari purchased a tractor that was manufactured by Long and assembled by Goodyear Tire & Rubber Company. Goodyear offered and sold the tractor to Calamari through a non-exclusive distributorship arrangement. Calamari signed an agreement that read, as follows: "We . . . will indemnify . . . against all loss or damages . . . paid or incurred by the purchaser by reason of death or bodily injury to persons arising or resulting from the use of products manufactured . . . or sold . . . or assembled . . . by the [Long] and sold to the purchaser . . . This customer agrees to hold [Long] harmless . . . against all claims, demands, and suits arising out of or in connection with this agreement." Calamari bought a tractor from Goodyear that Goodyear arranged to deliver. It is undisputed that Goodyear received a commission from Long. Goodyear offered and sold the tractor to Calamari under the agreement. As part of the process, the tractor was delivered to Calamari by Goodyear. Calamari was injured while using the tractor. He sued Long, alleging that his injuries were caused by a defect in the product. Long sought indemnity from Goodyear . . . Goodyear refused to indemnify Long. The Court concluded that the Hold Harmless Agreement did not extend to the products that were sold by independent dealers.

How to Prepare a Hold Harmless Agreement

Once you have determined that a hold harmless provision is appropriate, follow these practical tips:

  • The scope of the agreement can be tailored according to the facts. For instance, it may be broad enough to include all of one party’s damages, costs, liabilities, or losses that arise out of the performance of the agreement. Or it may be limited to the acts or omissions by one party, its employees, agents, contractors, or subcontractors that are negligent or intentional, and if you include "willful" acts, the parties must be warned that you need to understand whether the law permits such a waiver and the consequences of doing so. There is no requirement that the agreement relate to a specific event or be related to the subject matter of the original agreement (the contract) that the indemnity was included in.
  • If the parties are corporations that own other corporations, the indemnities could extend to subsidiaries, or parent corporations. If the entity that you want included is a subsidiary , you need to be sure to include that entity and its affiliates in the agreement.
  • It is critical that you share any specific circumstances that involve risk of loss, liability, or exposure with your lawyer so that he or she can be sure that the proper words are used and the right persons/entities are included in the provision.
  • Finally, remember that no matter how clear you are in drafting an indemnity provision that intends to be an indemnification agreement/automatic hold harmless indemnity, a court will not only look at the language, and its context with reference to the contract from which it came, but will also look at the circumstances, the relationship between the parties, the subject matter and the intent of the parties and will hold a party liable for something that it may have thought it was not liable for if that party does not outline those circumstances and apply the clear intent of the parties to the circumstances. In other words, words mean things, but in legal drafting the precise meaning must be made clear to the courts because the court is not bound to apply those commonly understood meanings.

Typical Situations in Real Estate Where a Hold Harmless Agreement May Come Into Play

Hold harmless agreements are frequently used at various stages of a property’s life cycle. These agreements typically offer protection from personal liability while the property is owned, but there are also examples of where they may be relevant for transactions, leasing and construction.
Property Transfer – These circumstances typically involve an agreement between buyer and seller where the seller holds the buyer harmless from claims for any third party injuries prior to the date of closing on the purchase of the property. For example, assume that a property owner sells its property to a developer. The seller warrants that the property is free of toxic chemicals and that there is no underground storage tanks. Winning Centralia Coal Deal Shows Power of Hold Harmless Clause that Applies to Third Parties However, once the development is complete the buyer finds that the property is contaminated with lead and other toxins due to the breakdown of lead-based paint, preservation of which was a condition of the sale. In this situation the buyer successfully makes a demand under the hold harmless provision in the Agreement of Sale.
Leasing – Hold harmless provisions should be included in leases of real property where the landlord has no control over acts or omissions of the tenant, its employees, guests or agents. These provisions limit the liability of the landlord for any injury to persons or property due to the acts or omissions of the tenant. Doing so gives the landlord some comfort in renting its property for significant sums without having worry about extensive potential liability under circumstances where he may have no control.
Construction – Hold harmless provisions are especially important where construction work is involved. These indemnity clauses are routinely used in the context of construction contracts. In the event a construction company injures someone who is not one of its employees, but who is on the job site, the general contractor can be protected from liability through appropriately drafted Hold Harmless Provisions. A Subcontractor’s Liability Coverage May Extend to the General Contractor for Claims Asserted by Property Owners for Bodily Injury Arising Out of the Construction Project.

Commonly Asked Questions about Hold Harmless Agreements in Real Estate

What is a hold harmless agreement?
A provision or clause in a contract in which both parties agree that one party will not hold the other party liable for any loss, failure, damage or expense incurred.
What is the purpose of a hold harmless agreement?
To indemnify one party against claims or damages, in which it holds the other party harmless.
Who enters into a hold harmless agreement?
It can be between two individuals or organizations, and often occurs in contracts, leases, releases, service agreements or insurance policies .
What does a hold harmless clause typically include?
Particular details will vary based on the context, but common inclusions are: parties involved, indemnifying party, indemnification process, duration, liabilities and claims.
Are these agreements enforceable?
They are generally enforceable as long as they are lawful, don’t violate public policy and are based on a lawful consideration.