A hold harmless agreement in real estate moves any property liability from the seller and places it with the buyer. It's a contract commonly used during the purchase of distressed homes and foreclosures. A property lien, claim, or other issue can take time to resolve, and so the seller transfers the responsibility of clearing up those issues to the buyer through the signing of a hold harmless agreement.
There are other ways in which hold harmless agreements are used in real estate. Landlords usually include a hold harmless clause in their leases that release them from responsibility should the lessee or tenant cause damage to the rental property. Real estate investors are also well versed in hold harmless agreements, as they are also used in construction. Contractors and subcontractors include a hold harmless clause in their work contracts to insure themselves against claims, losses, expenses, or any other damages incurred while they're doing the work they were hired to do.
For investors just getting started out in real estate, a hold harmless agreement might seem like a deterrent to buying a property. However, these liability forms are a common occurrence. It's important for investors to do their due diligence with any property by doing a title search and getting an inspection. And of course, it's recommended to have a real estate lawyer review the contract to ensure the assignment of liability is clear.
What information is needed for a hold harmless agreement?
In general, here's what should be included in a hold harmless agreement:
- The name of the party being held harmless, and specifically the name of the person signing the agreement.
- The party providing the protection.
- The type of protection promised.
- A time frame for the protection (for construction, this would be the work timeline).
Again, it's important to have an attorney review the language/terminology used so that there's no question later about who -- or rather who is not -- held liable.
Types of hold harmless agreements
A hold harmless agreement may be called any of the following:
- hold harmless agreement.
- hold harmless letter.
- hold harmless provision.
- hold harmless release.
- hold harmless clause (part of a larger contract).
- waiver of liability.
- release of liability.
In general, there are two types of hold harmless contracts: unilateral and reciprocal. Unilateral contracts stipulate that one party agrees not to hold the other liable. Reciprocal contracts include an indemnity clause that relieves both parties from liability.
Hold harmless agreements in construction
Landlords and real estate investors who are renovating properties must pay careful attention to hold harmless contracts when they hire a general contractor, who will likely hire a subcontractor. A unilateral contract would indemnify the property owner if the general contractor or subcontractor is hurt on the job, while a reciprocal contract would indemnify the contractors should someone get injured later as a result of the work done.
For example, if a contractor is installing a pool, a unilateral hold harmless agreement would protect the homeowner from liability if the contractor got hurt on the job. If it were a reciprocal contract, it would also indemnify the contractor should someone get hurt using the pool after it's installed.
There are three types of hold harmless agreements commonly used in construction: broad, intermediate, and limited.
- Broad. This type of contract covers all negligence for all parties. It's so broad, though, that it can be open to very wide interpretation that can be hard to hold up in court.
- Intermediate. This is a common contract in construction. It stipulates that the subcontractor is liable for any accidents or other issues resulting from negligence. However, the subcontractor is only held responsible for personal actions, not those of the contractor. It does not assign fault, only responsibility. In the case of negligence by both the contractor and the subcontractor, the subcontractor will only be held liable for their own part.
- Limited. A subcontractor is held liable for accidents or negligence in a limited or proportional way. This means that if others are also found to be negligent, then they will be held responsible in their own contract while the subcontractor is responsible for only their own actions.
The disadvantages of hold harmless agreements
While it's important to assign responsibility and potential liability or negligence in a real estate transaction or a construction contract, an indemnity agreement like a hold harmless provision might not always protect either party. The issue with these agreements is that they tend to be worded too broadly, making them open to wide interpretation in a court of law.
Some states have anti-indemnity regulations, which can limit or even prohibit hold harmless agreements. In some instances, it could be argued that one party was coerced into signing the agreement and that the other party couldn't possibly be free of any responsibility or liability should something unfortunate occur.
The bottom line
There are many legalities in real estate investing that are best handled by an attorney. It’s important to consult one any time a hold harmless agreement in real estate is signed to ensure you're protected.