May 27, 2020

May 27, 2020

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May 26, 2020

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Waivers of Subrogation: Sometimes Beating A Dead Horse Can Bring It To Life

How many times must learned real estate leasing scholars expound upon a given topic before that topic is deemed the proverbial "dead horse?" In the case of waivers of subrogation, apparently the answer is: never.

On its face, a waiver of subrogation seems a fairly simple concept. It protects the recipient of the waiver from having another party's (the "Insured") insurance company step into the Insured's shoes and pursue recovery from the waiver recipient for payments made by an insurer to reimburse the Insured for a covered loss caused by the waiver recipient or others for whom it is responsible. In the context of a commercial lease, it obviously makes sense for the landlord and the tenant to mutually waive their rights of subrogation against one another for covered property losses and allow their respective insurance companies to bear the risk and cost of a covered loss. Thus, the beauty and (seeming) simplicity of a waiver of subrogation.

However, commercial leases are by their very nature complicated beasts. They contain a myriad of interrelated terms and provisions, which poses the risk of having critical lease provisions conflict with one another or otherwise invalidate the intent of the parties in some important respect. This is particularly true in the case of the (seemingly) simple waivers of subrogation.

In order for a waiver of subrogation to truly be effective, both landlord and tenant must contractually agree that they will insure their respective property interests (either real or personal) to the full replacement cost of those property interests. Unless the parties are required to, and do maintain insurance coverage for such full replacement cost, the waiver of subrogation could be rendered meaningless. If insurance is not obtained in the first place, there is no coverage and no subrogation to be waived. The uninsured party is then at risk of having the party suffering the loss pursue it for that loss. Moreover, if a party is not required to, or otherwise fails to insure its property to 100% of the replacement cost, that would leave a coverage "gap" representing the difference between the insurance maintained and the actual replacement cost of the damaged property. The party suffering a property loss (landlord or tenant) could then pursue the responsible party for "gap" – the difference between the amount paid by its insurance company and actual cost to replace the lost or damaged property.

It is also imperative that the lease provide that the landlord and tenant broadly release and waive any claims against each other with respect to insured property losses. Absent that waiver, a standard indemnification clause would require one party to indemnify the other party from any losses that may have been caused by such party to the other party's property. This would be at odds with, and subvert the concept of, the waiver of subrogation.

So to summarize, the concept of a waiver of subrogation in the context of the commercial lease is tremendously important. That said, the waiver must be carefully crafted and accompanied by appropriate contractual requirements that the parties insure their respective property to 100% of the replacement cost thereof. And finally, in order to close the loop and ensure that unanticipated recourse by one party (or its insurance company via subrogation) against the other is not left in place, an appropriate and broad-based release and waiver of claims for damages to the parties' respective property, to the extent such property is either insured or required to be insured pursuant to the provisions of the lease, is essential.

You have read (and will continue to read) about waivers of subrogation as long as retail and commercial leasing takes place. But caution must be exercised in order to ensure that the intent of the parties in releasing one another and waiving subrogation rights is not abrogated by virtue of other inconsistent provisions of the lease.

The "dead horse" lives on...

©2020 von Briesen & Roper, s.c


About this Author

Chris A. Jenny, von Briesen Roper Law Firm, Madison, Corporate, Real Estate and Family Estate Law Attorney

Chris A. Jenny is a Shareholder in the Madison office of von Briesen & Roper, s.c. He focuses his practice on representing business owners in a wide variety of niche markets to become more profitable while minimizing their risk and expenses. Chris’s practice has a heavy concentration in the real estate, construction, and information technology industries. This practical experience is a tremendous benefit to the contractors, suppliers, landlords, tenants and real estate developers he represents. Chris’s construction...

William West, von Briesen Roper Law Firm, Milwaukee, Corporate and Real Estate Law Attorney

Bill West is a Shareholder. He Chairs the Firm’s Business Section and the Firm’s Mergers & Acquisitions Section.

Bill is a trusted advisor to his clients and they rely on his ability to achieve desired outcomes in a practical, timely and cost-effective manner – in other words, he gets things done. He has over 30 years of experience in corporate and business related transactions including:

  • Mergers and acquisitions

  • Complex corporate and commercial transactions

  • Corporate governance and business counseling

  • Business formation, strategy and structure

  • Business succession planning

  • Commercial real estate

Bill’s clients are involved in a range of industries, and include public and privately held businesses engaged in a wide variety of domestic and international transactions including asset and equity acquisitions, mergers, reorganizations, divestitures and restructurings.

Bill is also co-chair of the firm’s Retail Real Estate section. He represents clients nationwide in the purchase and sale of commercial real estate. Bill has a national practice handling the retail real estate leasing needs of both tenants and landlords.

Bill is a member of the American Bar Association (member of the Business Law, Real Estate and Taxation sections), and the State Bar of Wisconsin. He is also a co-author of LLCs and LLPs: A Wisconsin Handbook, 1st, 2nd and 3rd Editions, published by the State Bar of Wisconsin.

Bill is recognized by The Best Lawyers in America® as “Lawyer of the Year” for Closely Held Companies and Family Businesses Law in Milwaukee (2017). He is listed in The Best Lawyers in America® for Business Organizations (including LLCs and Partnerships) (2015-2018) as well as Closely Held Companies and Family Businesses Law (2014-2018).

Bill served as Chair and a member of the Board of Directors of Catholic Memorial High School.