Every real estate investor should be familiar with the means to protect their finances in event of damages and accidents happening on the property. When investors know how to protect themselves, they ensure their finances are secured.
Explore the potential of hold harmless agreements in real estate and the most important things to know about them below.
What Is a Hold Harmless Agreement?
A hold harmless agreement is a stipulation found within a legal contract that establishes where a given party’s responsibility for liabilities begins and ends.
Hold harmless agreements can appear in many contracts: a gym might have a hold harmless agreement with their clients in the event of their injury, while a business may have an agreement with their employees. Hold harmless agreements may appear frequently in real estate contracts.
A hold harmless agreement in a real estate contract absolves one party involved in the contract from liability; the signer of the agreement—usually the buyer or the tenant—effectively takes on responsibility for the enumerated potential damages or accidents that may happen on the property.
Hold harmless agreements are generally open to discussion. They are features of real estate contracts where the two parties involved have the opportunity to determine each of their respective responsibilities in full.
By discussing the extent of liability transfer in the agreement, the parties involved make it abundantly clear who is liable in the event that the property is damaged, equipment on the property is damaged, or people on the property are injured.
How Do You Establish a Hold Harmless Agreement?
Hold harmless agreements can be established through a number of written, contractual formats.
Hold harmless clauses provide the legal structure for the liability transfers of a hold harmless agreement in a real estate contract. They are the most common examples of hold harmless agreements in action; specific clauses in a given real estate contract outline the scope of liabilities related to the property.
The legal basis of a hold harmless agreement can also be established in hold harmless agreement letters or liability and lien waivers.
While there can be many ways to establish the legal basis of a hold harmless agreement, what’s most important is that the purview of the agreement is clear, with all parties signed on in full agreement.
Why Is a Hold Harmless Agreement Important?
Hold harmless agreements establish the legal basis upon which potential damages are settled. In effect, they outline the contractual obligations of the parties signed onto the real estate contract and legally protect the given parties’ finances.
Buyers and sellers, landlords and tenants, developers and contractors, and any party signed onto a hold harmless agreement has a legal and financial stake in the particulars of the hold harmless clauses outlined in the contract. They are of the utmost importance in discerning who is at fault, who isn’t, and who is responsible for extremely costly financial compensation.
Because of their legal and financial importance, the importance of clarity in a hold harmless agreement cannot be understated for every party involved. Accidents and damages can strike at any time. When these confounding events arise, a clear program forward makes addressing these events easier for all parties involved.
What Is Covered in a Hold Harmless Agreement?
Depending on their context, hold harmless agreements can cover a number of liabilities; that’s why they are so important to a contract. In a real estate context, harmless agreements generally cover specific instances of property damage or accidents and injuries sustained on the property.
The waiver of liability outlined in a hold harmless agreement typically originates from the property owner or a transfer of liability from the former property owner of a sold property to the new one. Without a hold harmless agreement, property owners leave themselves vulnerable to financial risks as they may be liable for any damages left undefined.
Therefore, the scope of liabilities waivers covered by a rental agreement must be clearly established in the agreement. In most cases, agreements are unilateral; they cover a wide range of potential liabilities by establishing full liability on the signee.
In a real estate context, these liabilities may refer to:
- Injuries sustained on the property
- Property damages owned by the property owner
- Property damages owned by the tenant
Specific Example of a Hold Harmless Agreement
Suppose a property owner hires a maintenance technician to make repairs on their property. Before doing so, they may include a hold harmless agreement that absolves the property owner of any injuries the technician may sustain while on the property grounds, like if they slipped, fell, and hurt themselves.
In this instance, the technician would be signing a unilateral liability waiver; they absolve the property owner of responsibility over any injuries.
Additionally, technicians may propose a reciprocal hold harmless agreement, wherein they are absolved of any injuries sustained in regard to the subject of their maintenance, such as roofing or electrical work.
When Should I Consider Using a Hold Harmless Clause?
To better protect their finances, real estate investors should know when they need to consider holding harmless clauses in their managed assets. There are many contexts in which real estate investors should think about including a hold harmless agreement in their contracts.
Here are three clear instances where a hold harmless agreement can save real estate investors from potential financial headaches:
- Selling a property
- Property rental
Selling a Property
In the process of changing ownership of a property, investors should include a basic hold harmless agreement in the contract. While one might assume selling a property implicitly absolves the former owner of liabilities, the absence of a hold harmless agreement in the final document opens up the individual to potential damages even if they don’t own the property anymore.
It is always in an investor’s best interest to include even a simple hold harmless clause in a purchase and sale agreement.
Leasing a property can increase the likelihood of accidents happening on-site. Whether it is a residential property where tenants live or commercial property where tenants and their customers frequent the premises, property rentals invite the opportunity for damages and accidents because of the frequency of their use.
Including a hold harmless clause in a lease can make a significant difference in protecting the property owner from liability for damages if and when they occur.
Developing a new property can be a lucrative enterprise for investors, but active job sites can be quite risky.
Workplace injuries are unfortunately all too common over the course of a project’s development. Investors engaging in ground-up property development should absolutely protect themselves by establishing a hold harmless agreement with any party involved in the development process.
How To Make the Most of a Hold Harmless Clause
In order to maximize returns, investors need to thrive in every part of effective real estate ownership. More often than not, hashing out these nuanced complexities requires turning to third parties: legal experts and property managers to ensure an investor’s assets are protected from liability.
While third-party expertise may appear to be a budgetary encumbrance, its value becomes clear when accidents strike.
The Bottom Line: Hold Harmless Agreements Are a Crucial Part of a Complete Real Estate Investment Project
Investors need to actively ensure that their returns are protected to ensure they continue to generate the best possible return. In the case of hold harmless agreements, turning to legal experts and qualified property managers can ensure that liability risks are kept at a minimum.
Therefore, taking on additional management expenses is the surest way to ensure a complete, protected return. Favorable financing options can ensure investors have the resources to take on all the assistance they need to protect their existing assets by keeping loan payments low.