Guard Against Liability for Tenant's Environmental Contamination

Many tenants—such as dry cleaners, photo processors, printers, gas stations, or nail salons—use or generate hazardous materials in their spaces. If those hazardous materials leak into your building or center or the surrounding area, you could face big trouble. Both you and the tenant that used or generated the hazardous materials risk being sued by anyone whose property is damaged by the contamination or who becomes ill or loses business because of it. For example, you could be sued by one of your employees; a visitor to the tenant; another tenant or occupant of your building or center; a nearby property owner or its employees, tenants, or occupants; a governmental agency; or a citizen's group. And you could wind up paying steep fines and cleanup costs for contamination that was the tenant's fault—and that you may have been totally unaware of until after it occurred.

Although you may think that the standard general indemnification clause in your lease will protect you financially, you may be in for an unpleasant surprise. If the general indemnification clause doesn't specifically address the costs you must pay because of the tenant's environmental contamination, the tenant could argue—and a court might agree—that the clause isn't broad enough to require the tenant to indemnify you for some or all of those costs.

To better protect yourself, New York City attorney Jeffrey A. Moerdler recommends that you add a clause to all of your leases—not only for those tenants that use or generate hazardous materials. That way, you're protected if the tenant's operations change or the lease is assigned or sublet to someone that uses or generates hazardous materials, he explains. The clause should specify that the tenant must indemnify you for costs relating to environmental contamination it causes. There's a Model Lease Clause below that you can adapt and use for this purpose.

List Covered Costs in Indemnification

Leases with tenants that intend to use hazardous materials in their spaces typically include an environmental compliance clause that controls the use and release of hazardous materials at the tenant's space, says Moerdler. But to adequately protect yourself, add that clause and a detailed “environmental indemnification” to all of your leases that says that the tenant must indemnify you for any costs you incur because the tenant violated the environmental compliance clause, advises Moerdler. To avoid disputes with the tenant over which costs are covered by the indemnification, include as comprehensive a list as possible of specific costs, he says. Then say that the covered costs aren't limited to the listed costs. For example, you could list the following costs in the clause:

Assessment and remediation costs. All costs you incur in studying, assessing, containing, removing, remedying, mitigating, or otherwise responding to the release of any hazardous materials at the tenant's space [Clause, par. a(i)].

Governmental costs. The costs you paid to any governmental agency for studying, assessing, containing, removing, remedying, mitigating, or otherwise responding to the release of any hazardous materials at the tenant's space [Clause, par. a(ii)].

Fines and penalties. The fines or penalties you owe to a third party because the tenant didn't comply with environmental laws or its lease obligations [Clause, par. a(iii)].

Legal fees. Any legal fees related to any costs covered by the clause [Clause, par. a(iv)].

Make Sure Indemnification ‘Survives’ Lease

Insist that the indemnification continue after the lease ends. An environmental claim may not be made until after the lease expires because the relevant statute of limitations—the time limit on making such claims or suing—can extend for many years, Moerdler notes. To do this, say in the lease that the environmental indemnification will “survive” the end of the lease, he says [Clause, par. b].

Practical Pointer: Expect a savvy tenant to demand that the environmental indemnification be mutual, says Moerdler. That is, it will want you to agree to indemnify it for any costs it incurs related to environmental contamination that you caused at the building or center, he explains. Depending on the size and negotiating power of the tenant, try not to give into this demand, he advises.

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.