Environmental provisions in commercial leases: The details lie beneath the surface - Part 2 - by Zachary Drench

Part one of this article appeared in the January 30^th issue of the New England Real Estate Journal.

Landlords should be wary of giving broad representations regarding the environmental condition of their properties. It is difficult to know with certainty that a given property is free from hazardous materials, and even if that statement is qualified to landlord’s knowledge, it would be difficult to prove that one did not know of past contamination should it ever be discovered. Moreover, it is rare for land in developed areas to be entirely free of hazardous materials; the accretion of pesticides, traces of construction materials, automobile leaks and emissions, and everyday litter all contribute to ensure that if you seek to find hazardous materials, you likely will be successful. Giving an unqualified representation simply because the property is thought to be “clean” may backfire if any such surprise contamination is discovered. It is preferable to base a representation as to the presence of hazardous materials upon the information in a specific environmental report (such as Phase I environmental site assessment) rather than upon general knowledge, and to limit such statement to the presence of hazardous materials in violation of environmental laws (which sets the bar higher than trace amounts that do not require any reporting or response actions but otherwise could lead to a purely technical breach of a representation or warranty).

Discussion of these factors need not make the prospect of leasing space on a property with pre-existing contamination appear daunting. From a tenant’s perspective, it is a matter of conducting proper diligence and confirming that proper safeguards are in place, while landlord needs to make certain that tenant understands and agrees to any limitations on the use of the property resulting from the presence of contamination or ongoing response actions.

For tenants, diligence is key. In Massachusetts, it is relatively easy to check an online database to determine whether a property has been the site of a reported release of hazardous materials, and if so, the status of response actions. From there, one can obtain more information from landlord as to the nature of the contamination, whether it has been fully resolved, and if not, how it will be resolved. It is important to know whether any restrictions on use of the property could impede tenant’s intended use of the premises. It is also important to know whether site conditions present potential risks that could be problematic for tenant’s specific use. An industrial tenant might take the property’s prior contamination in stride; conversely, if hazardous materials previously discovered are the same as those used in an industrial tenant’s operations, then tenant may be concerned that future discovery of prior releases of hazardous materials could be attributed to its current use. Other tenants (for example, a day care facility) may be especially sensitive to environmental conditions or could simply perceive the environmental conditions to be potentially alarming to its employees and customers. All these questions are better to ask in advance of signing a lease rather than after. 

For landlords, in addition to the care with which representations and indemnifications must be given, appropriate disclosure of existing conditions and restrictions must be made. Any activity and use limitation (AUL) on the property must be disclosed in the lease. In Massachusetts, failure to make such disclosure renders the lease voidable by tenant, even if the AUL does not restrict a particular tenant’s use of its premises (e.g., the AUL prohibits residential uses but the tenant’s use is commercial). It is therefore critical that the lease properly identify the AUL, with an agreement by tenant to comply with its terms. Any areas that are capped to prevent exposure to hazardous materials or in which a remedial system is operating should be identified to tenant so that tenant does not inadvertently damage or hinder them – and to ensure that tenant agrees to be liable in the event that it causes any such damage or hindrance.

The foregoing is intended to illustrate the risks of treating environmental provisions of a lease as mere boilerplate. The subject matter is simply too fact-specific to permit a one size fits all approach. With proper care, however, these issues can be properly addressed so that neither landlord nor tenant assumes unnecessary risks and obligations.

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