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Property Management Agreement’s Indemnity Provision Held Void and Unenforceable Under the Construction Contract Indemnification for Negligence Act

By Eric Dobradin

Owners of rental properties commonly rely on third-party property managers to handle the day-to-day aspects of leasing. Many property managers not only list available units, enter into lease agreements on behalf of the property owner, and handle payments under the lease, but they also deal with tenant repair requests and property maintenance. The specific scope of a property managers responsibility is outlined in a property management agreement with the property owner. Commonly such contracts include indemnity and insurance clauses that shift the risk of financial responsibility in the event of a lawsuit onto to the unit owner. Property managers should be aware that if such an indemnity clause is written too broadly, it may very well be unenforceable in Illinois. That is what happened to a property manager hired to lease and maintain a condo unit by owner. The owner was represented by Gardi, Haught, Fischer & Bhosale, Ltd.

A long-term tenant filed a lawsuit claiming the condo-owner, the owner’s property manager, the condo association, and the association’s property manager were negligent in allowing elevated levels of mold to accumulate in the unit, causing the tenant serious and permanent health problems. In response to the lawsuit, the unit owner’s property manager counter-sued the unit owner under the property management contract for the costs of its legal defense and for the amount of any judgment entered against the property manager. The property manager also sued under the joint tortfeasor statute for contribution. The unit owner filed a § 2-619 motion to dismiss the first two counts arising from the contract arguing that the indemnity provision in the property management contract was void and unenforceable under the Construction Contract Indemnification for Negligence Act 740 ILCS 35/1 (CCINA) and against public policy.

The CCINA provides that in contracts or agreements, either public or private, for the construction, alteration, repair or maintenance of a building; every covenant, promise or agreement to indemnify or hold harmless another person from that person’s own negligence is void as against public policy and wholly unenforceable. The issue before the Court was whether a property management contract can be subject to CCINA.

The property manager argued that there are no Illinois appellate decisions making a property management contract subject to the CCINA, the CCINA only applies to construction contracts, and CCINA is meant to deal with injuries in the workplace. The property manager contended that the CCINA should not apply because it was hired to lease the unit and handle tenant repair requests and maintenance, if needed. Since the unit was not under active construction, the property management agreement was not a contract for repair and maintenance, but simply a contract to manage the rental property. Furthermore, if the court grants the motion, the decision would have far-reaching ramifications on all the property managers using the same indemnity provisions.

The unit owner responded by pointing out that the property management agreement specifically included provisions for the repair and maintenance of the unit. It also provided that the property manager would hire and supervise workers performing repair and maintenance on the unit. As such, the unit owner concluded that the CCINA applied to the contract as one for repair and maintenance of a building. Accordingly, the CCINA renders the indemnity provision void and unenforceable because the only claim against the property manager was for negligence. If the provision is enforced, it would make the unit owner responsible for the judgment and legal defense for the project manager’s negligence, undermining any incentive for property managers to act with due care in doing their jobs.

The Court sided with the unit owner reasoning that since the CCINA applies to contracts for repair and maintenance of buildings and the property management contract made the property manager responsible for repairs and maintenance, the property management contract was subject to the CCINA. The provision in the contract is void and unenforceable under the CCINA, because it would indemnify the property manager from any judgments and lawsuits, potentially including those resulting from the property manager’s own negligence, as alleged in the tenant’s lawsuit. The Court granted the unit owners § 2-619 motion to dismiss with prejudice as to the Counts demanding the unit owner pay for the property manager’s legal defense and any judgment against the property manager on the tenant’s negligence claim.

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