Environmental provisions in commercial leases: The details lie beneath the surface - Part 1 - by Zachary Drench

Part two of this article will appear in the February 13^th issue of the New England Real Estate Journal.

Commercial lease provisions regarding hazardous materials and environmental compliance are often relegated to standard generic provisions near the end of the document. This can be a mistake. Leases for manufacturing or logistics uses should be treated differently from retail or office use, as should a property with a clean environmental history as compared to a contaminated property. In all such situations, however, environmental risks and the responsibility for dealing with environmental conditions should be carefully allocated.

 A landlord’s commercial lease form often prohibits the tenant from using hazardous materials entirely and requires that tenant indemnify landlord against liabilities arising from the release (or mere presence) of hazardous materials on the property. Tenants for their part often mark up such a form by inserting an indemnity against all environmental liabilities caused by anyone other than the tenant itself as well as broad representations and warranties by landlord that the property is free from oil and hazardous materials. Neither position is especially useful.

 Starting with the blanket prohibition on hazardous materials, virtually all uses involve hazardous materials to some degree. Offices use copy machine toner; retail and restaurant uses at a minimum have cleaning solvents on hand; and industrial uses incorporate oil and hazardous materials into their manufacturing operations, employ them in the maintenance of equipment, or both. At the very least, a lease prohibition against hazardous materials should carve out standard office materials and cleaning supplies in customary amounts, provided that they are used, stored, and disposed of in compliance with applicable laws and regulations. For uses involving hazardous materials beyond office and cleaning supplies, such materials should be expressly allowed, either as those generally associated with the permitted use of the property, or specified by name and quantity on a lease exhibit.

 Environmental indemnities likewise should be tailored to existing property conditions. As a baseline, an indemnity against liability arising from a release of hazardous materials caused by a party or its agents, employees, and contractors is appropriate, whether given by landlord or tenant. Beyond that, however, one should be careful. Landlord may be asked to indemnify tenant against all pre-existing environmental conditions, but if offsite contamination may have migrated onto the property, or if less than the entire property has previously been assessed, then the scope of landlord’s indemnity should be limited to on-site and specifically identified pre-existing conditions. Landlord may also be asked to indemnify tenant against all future releases not caused by that tenant, but if another tenant on the property uses hazardous materials, then that indemnity should be narrowed to exclude releases by third parties. In any event, the potential for a trespassing “midnight dumper” by itself should make a landlord resist giving broad indemnities against future releases of hazardous materials. By the same token, a tenant asked to give an environmental indemnity should seek to limit its responsibility to releases that occur after tenant takes possession of its premises, and then only for acts or omissions of parties that it controls. If there is known pre-existing contamination on the property, then tenant should seek to limit responsibility for known pre-existing contamination, unless tenant makes, adds to it, or disrupts containment or treatment measures.

 Another potential pitfall lurks in the coverage provided by the environmental indemnity. Typical contractual indemnities cover all claims, losses, liabilities, damages, costs, expenses, etc. arising from the occurrence of a particular event. Personal injury may be included expressly, or it may be implied. While common in general indemnities, this inclusion is problematic in the context of an environmental indemnity, where personal injury does not mean a slip and fall or an automobile collision, but a cancer diagnosis. The causal link between an employee’s illness and a release of hazardous materials on the property where that employee worked can be extremely difficult to prove – or, for that matter, to disprove. The potential for multimillion dollar liability should not be left to the chance that a jury finds that the illness was caused by hazardous materials on the property and that the environmental indemnity can be invoked against landlord. An indemnity that covers only response action costs (i.e., the costs to “clean up” the release) precludes that potential, and is the better approach. A tenant might seek to broaden that indemnity to cover property damage claims, on the chance that a release of hazardous materials contaminates tenant’s equipment or inventory. On the other hand, a landlord that is in the process of responding to a prior release may want to expand the indemnity to cover claims and liabilities arising from a tenant’s damage or disruption to remedial systems that are already operating.

Zachary Drench is a partner in the Sherin and Lodgen’s Real Estate Department, Boston.