Get Right to Pass Through Lender-Required Environmental Costs

When you try to finance or refinance a loan, don't be surprised if a lender becomes skittish if your building or center has one or more tenants who use hazardous substances. As a condition of its consent to your financing or refinancing, the lender may require you to take out environmental insurance or to pay for environmental inspections at your building or center.

Ideally, you want to pass through these lender-required environmental costs to your tenants. But if your lease is like many we've seen, it may have this costly loophole: It doesn't let you pass through the costs. So you may have to foot a very big bill on your own.

Ohio Owner Can't Get Lender-Required Costs from Dry Cleaner

For example, to refinance a loan, an Ohio shopping center owner was required by the lender to pay for environmental insurance and site-testing costs. The owner then demanded reimbursement from its dry cleaning tenant. The owner claimed that the costs were incurred because of chemical spills in the tenant's space. When the tenant refused to reimburse the owner, the owner sued the tenant. The tenant asked the court to dismiss the case.

An Ohio appeals court dismissed the case. The court said that nothing in the lease required the tenant to reimburse the owner for those environmental costs [D&J Co. v. Stuart].

Pass Through Environmental Costs

You can avoid a similar fate, says Ohio attorney Abraham Lieberman. How? By including in the operating expense/CAM cost definition of every tenant's lease the costs of environmental inspections, insurance, assessments, surveys, and reports required by the lender in connection with a financing or refinancing, he says. This way, you can pass through all of these costs to your tenants.

Add Lease Language

To get the right to pass through these lender-required environmental costs to your tenants, include the follow-ing language in your lease's operating expense/CAM cost definition, says Lieberman: CLLI0043

Model Lease Language

(x) The cost of environmental inspections, including, without limitation, soil tests, of the [Building/Center]; the premiums for environmental insurance; and the cost of all environmental assessments, surveys, and reports requested by any mortgage lender or potential mortgage lender in connection with any refinancing to be secured, in whole or in part, by the [Building/Center].

Practical Pointer: A savvy tenant that never uses hazardous substances may demand that you delete the lender-required environmental costs from its operating expense/CAM cost definition. Depending on the tenant's negotiating strength, you may have to give in on this point, says Lieberman.

CLLI Source

Abraham Lieberman, Esq.: Member, Baumgartner & O'Toole, 5455 Detroit Rd., Sheffield Village, OH 44054; (440) 930-4001; alieberman@b-olaw.com.