Shift Liability for Hazardous Materials, Compliance to Tenant

You must be aware of the presence of hazardous materials on your commercial property so that you can not only minimize the risks they pose, but also use lease provisions that shift liability for them to your tenant. Before drafting provisions that specify these things, find out exactly what materials on your property are considered “hazardous” under the law. But be prepared: Hazardous materials are defined so broadly that virtually every commercial property—and most likely yours—has at least one.

Regulations Meant to Protect, Not Restrict

Each state or federal statute that governs the regulation of “hazardous materials” defines them differently, but generally broadly depending upon the purpose of the regulation. Regulatory programs that apply to handlers of hazardous materials have the broadest definitions. Commercial building tenants can be handlers of hazardous materials—and subject to those broad definitions—even if the tenant uses only a single product that falls under that umbrella. This means that in addition to common chemicals used in commercial buildings—such as emergency generator fuel, cooling system chemicals, and hydraulic fluids—janitorial cleaning materials and even copy machine toner are considered to be hazardous.

Because monitoring a potentially exhaustive list of materials on your property creates extra work for you, you may feel unnecessarily restricted. Broad definitions are used to give regulatory agencies broad authority to regulate hazardous materials. “These broad definitions are not meant to restrict, so much as to regulate hazardous materials,” says Eileen Nottoli, who practices environmental law in the San Francisco, Calif., office of real estate firm Allen Matkins Leck Gamble Mallory and Natsis LLP. They are designed to protect people and the environment, she stresses.

For example, under Occupational Safety and Health Administration (OSHA) regulations, materials are hazardous if they pose a physical or chemical threat to an employee. This includes household cleaning chemicals when they are used in quantities that exceed household use. Using window cleaner in large volumes gives OSHA the opportunity to regulate how the employer stores and handles such materials, and what kind of employee disclosure and protective information it provides.

Environmental programs require you to make sure that the underground storage tank and pipes for your emergency generator are not leaking, submit to regular inspections, and keep records. You also are financially responsible for any leaks. However, compliance with these and other regulatory requirements can become incredibly expensive, so shifting responsibility to the tenant whenever possible is critical, Nottoli says.

Make Tenant Solely Responsible for Compliance

The burden of complying with certain hazardous materials regulations is sometimes greater than the risk. For example, it may be burdensome for an office building to find a disposal site for fluorescent light tubes that are subject to hazardous waste regulations, even though the risk posed by them is insignificant.

You can shift the responsibility for—and the cost of—complying with hazardous materials regulations to tenants by including lease provisions that require them to be solely responsible for compliance with the law. Provisions could include language similar to “Tenant must comply with all applicable laws, and a failure to comply with them constitutes a breach of the lease resulting in termination.”

It is important to use a provision that requires the tenant to submit to periodic inspections by you and give you copies of any communication that it has with regulatory agencies—especially reports of any releases of chemicals from the building. For an example of environmental audit lease language you can adapt, see our Model Lease Clause: Negotiate Favorable Hazardous Materials Provisions [par. 2]. “This is where the owner has the distinct advantage of keeping a distance from the tenant's activities,” says Nottoli.

Adding an indemnity provision, like the one in our Model Lease Clause, makes the tenant liable to you for any environmental contamination resulting from its activities or a failure to act [Clause, par. 3].

However, if the tenant complains that the provisions are too restrictive, you may want to include a materiality provision specifying that a failure to materially comply with any applicable environmental requirements would constitute a breach. You can tailor the standard of materiality so that a minor infraction would not result in the termination of the lease.

Make Insurance Requirement Commercially Reasonable

Requiring tenants to have environmental insurance to protect against hazardous materials issues is an option, but whether prospective tenants will agree to it depends upon whether it is “commercially reasonable.” That is determined by the cost of insurance and how difficult it is to obtain rental space in the current market.

“If you are in a market where you have a lot of available retail and commercial office space, a tenant required to get insurance may walk and find another location. But if commercial space is really tight, a tenant might consider insurance,” says Nottoli. “Environmental insurance can be quite expensive, so it just may be commercially unreasonable to demand that,” she adds. “It is a business decision whether to make that demand, and how likely you are to succeed with it.”

Base Provisions on Due Diligence

Avoiding hazardous materials issues can be done in part by performing due diligence. Before renting to a tenant that uses hazardous materials, find out if there were any issues at its former site of operations and require it in the lease to obtain all the necessary permits and certificates and to demonstrate that it has registered with the appropriate regulatory agencies [Clause, par. 1]. If you find evidence of spills that have not been cleaned up in a timely manner at the tenant's last facility, it is an indicator that the tenant is an environmental risk.

“What's important for owners to remember is that they ultimately are liable if there is contamination resulting from a tenant's activity and the tenant is insolvent or otherwise unavailable,” says Nottoli. At the same time, that doesn't mean that you should avoid renting to tenants that handle hazardous materials. “Owners need to be smart about whom they lease to and what is required for the business,” she says. Take more precautions in a lease with a tenant that uses substantial quantities of hazardous materials than you would with a business that doesn't.

Recognize that because hazardous materials are so broadly defined, any or all of your tenants could be handling them. However, make it clear to prospective tenants that in order to rent space in the building they must be subject to provisions that will demand accepting liability for environmental contamination that accrued during their stay.

Insider Source

Eileen Nottoli, Esq.: Of Counsel, Allen Matkins Leck Gamble Mallory and Natsis LLP, 3 Embarcadero Ctr., 12th Fl., San Francisco, CA 94111-4074; (415) 837-1515.

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