Control Biotech Lab Tenant's Use of Hazardous Materials

Many owners view biotechnology laboratories as a new source of tenants to replace dot-com tenants that failed. Although biotech labs, which perform medical and scientific research, aren't new, they've multiplied and grown as recent medical advances have raised demand for their services. And unlike other types of biotech tenants—such as start-ups located in biotech incubators—many biotech labs are part of large pharmaceutical or medical companies, and others are smaller but with a proven track record and an established product or with strong financial backers. So they're less likely to crash and burn.

But renting space to a biotech lab can still pose serious risks for you. For example, a lab may keep hazardous—often radioactive—materials in its space, and your building could become contaminated if those materials aren't handled, stored, and disposed of properly. Once contamination occurs, you may have to deal with government agencies and the headache of a cleanup. You may also have to pay cleanup costs if the lease doesn't properly pass those costs through to the biotech lab tenant or if it's unable to pay. It's also possible that your other tenants might move out, and new tenants might stay away. Your lender might accuse you of violating your mortgage. And government agencies might slap you with huge fines.

That's why you should carefully consider whether a biotech lab is right for your building (see p. 6 for a list of factors to include in this consideration). If you decide to go ahead and rent to a biotech lab, you should make sure that your lease gives you the right to monitor and control the biotech lab tenant's use of hazardous materials in its space, advises New York City attorney Jeffrey A. Moerdler. To help you do this, CLLI, with Moerdler's assistance, has put together a checklist of 11 key environmental controls that you should add to your lease with a biotech lab tenant. We've also given you Model Lease Language you can adapt and use.

Key Environmental Controls

* Get Tenant's Assurances of No Prior Contaminations

If the biotech lab tenant hasn't had to perform environmental remediation in the past and isn't currently subject to any law enforcement order to remediate contamination, make it say this in the lease, advises Moerdler. You don't want a tenant coming into your building that has had, or is having, problems with environmental contamination, he warns.

Model Lease Language

Tenant hereby represents and warrants to Landlord that:

• a. Neither Tenant nor any of its legal predecessors or affiliates has been required by any prior landlord, lender, or governmental or quasi-governmental entity at any time to take remedial action in connection with the contamination of a property with Hazardous Materials, which contamination was permitted or caused by Tenant or such predecessor or resulted from Tenant's or such predecessor's action or use of the property in question; and

• b. Tenant is not currently subject to any enforcement order issued by any governmental or quasi-governmental entity in connection with the contamination with, or use, storage, handling, treatment, generation, release, or disposal of Hazardous Materials (including, without limitation, any order related to the failure to make a required reporting to any governmental or quasi-governmental entity).

Practical Pointer: If you find out before you sign the lease, that the biotech lab has had, or is having, environmental troubles, you'll have to decide whether those troubles are severe enough or frequent enough to warrant terminating the deal, says Moerdler. And if you decide to go ahead, you'll need to modify the lease language accordingly.

* Get Right to Terminate Lease if Tenant Wasn't Truthful

Say in the lease that you have the right to terminate it if you discover after it's signed that the biotech lab tenant had to perform environmental remediation in the past, is subject to a law enforcement order, or wasn't truthful regarding any other representations in the lease, says Moerdler. That should give the biotech lab tenant an incentive to be truthful.

Model Lease Language

If Landlord determines that Tenant's representations and warranties contained herein were not true as of the date of this Lease, Landlord shall have the right to terminate this Lease in Landlord's sole and absolute discretion.

* Require Tenant to Give You Hazardous Materials List

Require the biotech lab tenant to give you a list of all hazardous materials it plans to use, store, or dispose of from the space, says Moerdler. Have the tenant give you this list at least 30 days before the lease starts, so you know what to expect and can make any needed preparations, he advises. Also, require the tenant's list to show which government approvals or permits the tenant needs for the hazardous materials, he adds.

Model Lease Language

As a material inducement to Landlord to allow Tenant to use Hazardous Materials in connection with its use of the Premises, Tenant agrees to deliver to Landlord at least [insert #, e.g., 30] days prior to the Commencement Date a list (“Hazardous Materials List”):

• a. Identifying each type of Hazardous Materials to be brought upon, kept, used, stored, handled, treated, generated, released, or disposed of on or from the Premises; and

• b. Setting forth any and all governmental or quasi-governmental approvals and/ or permits required in connection with the presence, use, storage, handling, treatment, generation, release, or disposal of such Hazardous Materials on or from the Premises.

Practical Pointer: Make sure your lease's default clause is broad enough to cover situations where the biotech lab tenant doesn't provide you with a complete hazardous materials list whenever it owes you one, says Moerdler. Then you can take action against the biotech lab tenant if it provides an incomplete list.

* Require Tenant to Update Hazardous Materials List

Require the biotech lab tenant to update its list of hazardous materials periodically, says Moerdler. He suggests at least once a year. Also require the biotech lab tenant to give you an updated list at least 30 days before it brings a new type of hazardous material into its space, he adds. (The biotech lab tenant may demand that you reduce this time.) This way, you'll always have a current and accurate list of the hazardous materials in your building.

Model Lease Language

Tenant shall deliver to Landlord an updated Hazardous Materials List at least once every [insert #, e.g., 12] months and shall also deliver to Landlord an updated Hazardous Materials List at least [insert #, e.g., 30] days before any new Hazardous Material is brought into, kept, used, stored, handled, treated, generated, released, or disposed of from the Premises.

Practical Pointer: If an updated list shows that the biotech lab tenant intends to bring a particularly dangerous hazardous material into your building, what should you do? Practically speaking, once you've decided to accept a biotech lab tenant, you need to let it run its business, says Moerdler. Many biotech lab tenants use radioactive materials, he points out. But as long as they're using a reasonable amount and complying with the law, they won't want you to have the right to prevent them from bringing those materials into your building, he advises. Plus you don't want to get a reputation of being too restrictive—since that may scare away other prospective biotech lab tenants, he adds.

* Get Copies of Approvals, Permits, and Other Key Documents

Require the biotech lab tenant to give you copies of all government approvals and permits, as well as any reports and plans and other documents filed with government agencies—and any other documents that you reasonably request—relating to its use, storage, and disposal of the hazardous materials, says Moerdler. Get these copies before the lease starts, if feasible, he says—otherwise, before the biotech lab tenant begins operating at the space or bringing hazardous materials into the space. How long before? Try for at least 30 days, he suggests.

You can use the hazardous materials list to check that the biotech lab tenant has delivered all required approvals, permits, and other paperwork to you, says Moerdler. This way you can make sure the biotech lab tenant is properly licensed and approved to use the hazardous materials, he explains.

Also require the tenant to give you copies of any notices of violations it gets, he adds. That includes violations that didn't lead to enforcement orders against the tenant—rather it may have been required to correct them or pay a fee, he says.

Model Lease Language

Tenant shall deliver to Landlord at least [insert #, e.g., 30] days prior to [insert one: the Commencement Date; Tenant commencing operations at the Premises; or Tenant bringing any Hazardous Materials into the Building or Premises] true and correct copies of the following documents (the “HazMat Documents”) relating to the use, storage, handling, treatment, generation, release, and disposal of Hazardous Materials: Permits; approvals; reports filed with, and correspondence with, government agencies; storage and management plans filed with government agencies; notices of violations of any legal requirements; and any other documents that Landlord may reasonably request.

Practical Pointer: If the biotech lab tenant wants to build a storage tank—whether underground or aboveground, require it to first get your consent, says Moerdler. Also require it to give you installation and closure plans, as well as copies of any permits and approvals needed, he says.

* Get Right to Conduct Environmental Tests

Get the right to conduct environmental tests once each year to determine whether the biotech lab tenant's space has become contaminated, says Moerdler, and at any other time if you have a reasonable basis for believing that contamination has occurred. And try to get the biotech lab tenant to pay the cost of the testing, he says.

As an added protection, say in the lease that if you fail to conduct environmental tests in any year, you aren't waiving your rights to conduct environmental tests in later years of the lease, says Moerdler.

Model Lease Language

• a. Landlord shall have the right to conduct environmental tests annually, and at such other times as Landlord shall reasonably believe that any contamination of the Building or the Premises has occurred, to determine whether any contamination of the Premises or the Building has occurred as a result of Tenant's use, storage, handling, treatment, generation, release, or disposal of Hazardous Materials. Tenant shall be required to pay the cost of such tests.

• b. The failure of Landlord to conduct such environmental tests in any year shall not be deemed a waiver of Landlord's right to conduct such environmental tests in any other year during the Term.

Practical Pointer: Expect a savvy biotech lab tenant to balk at having to pay for your tests. As a compromise, agree that it must pay these costs only if contamination is found, says Moerdler.

* Don't Guarantee the Accuracy of Test Results

A biotech lab tenant may want you to give it a copy of any environmental test results you get. If you agree to provide the biotech lab tenant with this, make sure to state that you don't guarantee their accuracy, says Moerdler. Otherwise, any inaccuracy could come back to haunt you, he warns.

Model Lease Language

Landlord shall provide Tenant with a copy of all environmental reports and test results with respect to the Premises, made by or on behalf of Landlord during the Term to determine whether any contamination of the Premises has occurred as a result of Tenant's use, storage, handling, treatment, generation, release, or disposal of Hazardous Materials, without representation or warranty as to the accuracy of such reports and results.

* Don't Waive Rights by Getting Environmental Assessment

Say that although you get the results of those environmental tests, you're not waiving any rights that you may have against the biotech lab tenant, says Moerdler. This protects you if test results turn out to be inaccurate or incomplete and a contamination is later discovered, he explains.

Model Lease Language

Landlord's receipt of any environmental test results in no way waives any rights that Landlord may have against Tenant under this Lease, at law, or in equity.

* Require Tenant to Promptly Remediate Contamination

If the results of an environmental test you've ordered show that the biotech lab tenant has contaminated its space or any other part of the building, require it to immediately begin to “remediate”—that is, clean up—the contamination, says Moerdler. Make it responsible for diligently performing the remediation—in accordance with laws, rules, and regulations—and at its sole cost, he advises. Otherwise, you might be responsible for remediating the contamination, he warns.

Model Lease Language

Tenant shall, at its sole cost and expense, immediately commence and diligently perform to completion the remediation of any environmental conditions identified by such testing in accordance with all then applicable laws, regulations, ordinances, rules, codes, judgments, orders, or other similar enactments of any governmental or quasi-governmental entity regulating or relating to health, safety, or environmental conditions on, under, or about the Building or the Premises.

* Make Sure Tenant's Indemnification Covers Third-Party Contamination Claims

Make sure the indemnification clause in your lease is broad enough to require the tenant to indemnify you for claims against you by third parties relating to contamination caused by the biotech lab tenant, advises Moerdler. And even if it's broad enough, you may want to add a specific reference to environmental contamination because environmental contamination can be so expensive to “cure”—that is, fix.

* Keep Tenant Responsible for Contamination Found After Lease Ends

Keep the biotech lab tenant responsible for its environmental obligations after the lease ends, says Moerdler. Otherwise, for example, if you find contamination that's caused by the tenant after the lease has ended, the biotech lab tenant may argue that it's no longer responsible for the remediation, he explains.

Model Lease Language

Tenant's obligations under this Clause shall survive the expiration or earlier termination of the Lease.

CLLI Source

Jeffrey A. Moerdler, Esq.: Partner, Mintz, Levin, Cohn, Ferris, Glovsky & Popeo, PC, 666 Third Ave., New York, NY 10017; (212) 692-6700; jamoerdler@mintz.com.

Sidebar

* Control Disclosure of Tenant's Hazardous Materials Information

The biotech lab tenant may worry that giving you information about the chemicals it's using could put its business at risk, since the information might end up in the hands of its competitors, says New York City attorney Jeffrey A. Moerdler. You can ease its worries by agreeing to sign a confidentiality agreement. But if you sign one, make sure it lets you disclose the confidential information if 1) there are any health or safety risks, 2) you're involved in a lawsuit relating to its contents, or 3) you're required by law to disclose its contents, he says.

Sidebar

* Are Biotech Lab Tenants Right for You?

Biotechnology laboratory tenants can make special demands on your building and pose special risks for you, says New York City attorney Jeffrey A. Moerdler. So take a hard look at a prospective tenant that operates a biotech lab before you go forward and negotiate a lease with it. You'll need to determine whether it's the right type of tenant for your building. Consider the following:

Special Construction Features

The biotech lab tenant often requires special construction features for its space, says Moerdler. But the construction could be too expensive and impractical for your building. For example, the biotech lab tenant may require you to provide:

• Space with “environmentally controlled” rooms for experiments.

• Special climate controls and air filtration systems or separate air-handling facilities.

• Continuous access to a highly purified water supply.

• Access to affordable and adequately sized waste treatment facilities.

• Construction and designs that comply with strict federal regulations.

• High quality, continuous power supply, with standby power generators as a backup.

• Sufficient mechanical and electrical systems.

• Floors and rooftops that can hold heavy equipment.

• Adequate wiring for sophisticated information and communications technology systems.

• Access to sufficient amounts of fuel/gas.

• Greater than average floor-to-ceiling height (for additional HVAC ductwork).

• HVAC on a 24/7 hour basis.

• Access and use of the roof space for venting, cooling, and air quality monitoring.

Huge Tenant Improvement Allowance

The biotech lab tenant typically requires a huge tenant improvement allowance (TIA), says Moerdler. He has seen TIAs of more than $100 per square foot. You may not be able to afford a TIA that large.

Freedom to Assign or Sublet

The biotech lab tenant may demand the ability to assign its lease or sublet without much restriction, says Moerdler. That way, it can easily merge with another biotech company, be taken over, be subject to changes in control, or go public. But this might be a deal breaker—you may not want to proceed in lease negotiations if you're concerned that an assignee or subtenant may be undesirable.

Freedom to Make Alterations

The biotech lab tenant may want to reconfigure its space, without your consent, several times during the lease if its research project changes, says Moerdler. But you may want to control all alterations to make sure that they don't damage the space or make it unmarketable to a subsequent tenant.

Need for Future Expansion

If the biotech lab tenant's research project takes off, it may want more space. So it may want your assurance in the lease that you'll give it additional space when needed—say, by an expansion option or right of first offer, says Moerdler. You'll need to decide if that's something you want to commit to providing, he says, especially if it would prevent you from keeping your building full.

Need for Future Contraction

There's also the concern that the biotech lab tenant's research project may not succeed and it may need less space and fewer workers. So it may also want your assurance in the lease—by a contraction option—that you'll let it let it reduce its space, says Moerdler. But you may not want to commit to this option, especially since lenders don't like it.

Cancellation Right

The biotech lab tenant may demand a right to cancel the lease if its research project folds or you can't give it more space or meet its increasing program requirements. But giving a biotech lab tenant a cancellation right may cause problems with your lender, says Moerdler.

Increased Risk

Biotech lab tenants provide an increased risk for you because they use hazardous materials. The stakes are high—contamination can be expensive, even deadly. If you fail to follow through on the rights or controls you've given yourself—for example, you don't hire the environmental consultant and the building becomes contaminated—there's a greater risk that you could be held liable to someone who was injured by the contamination, warns Moerdler.

Increased Cost for Advisors

You'll need to consult a team of advisors if you're considering renting space to the biotech lab tenant, says Moerdler. For example, you'll need professionals experienced in the construction and leasing of biotech labs, including environmental consultants, architects, mechanical engineers, contractors (or design/builders), real estate brokers, and attorneys to manage this process. But hiring these advisors can be very expensive. And you may not be able to recover their cost from the biotech lab tenant, he warns.