Environmental Clauses in Industrial Leases

Attorney Zachary Drench of Sherin and Lodgen writes that hazardous materials provisions are often relegated to generic language near the end of a lease, and that this can be a mistake. Manufacturing and logistics uses should be treated differently from office or retail, and a property with a clean history differently from a contaminated one.

The stakes come partly from federal law. EPA explains that under CERCLA, also known as Superfund, persons may be held strictly liable for cleaning up hazardous substances at properties they currently own or operate, or owned or operated in the past. Whether any tenant is treated as an operator on specific facts is a legal question for your environmental attorney. It is reason enough to take the lease language seriously, because the lease is where you and the landlord divide responsibility between yourselves. Whether that changes your exposure to a regulator or other third party is also a question for your attorney.

State environmental laws can add their own obligations. FBT Gibbons points to one example, noting that in New Jersey some operations may implicate the Industrial Site Recovery Act in connection with transfers or operational changes. Ask counsel what applies in your state.

A baseline is a record of site conditions at the start of your tenancy. If contamination is found later, it helps show whether it was already there. Without one, you may be arguing years later about events no one can reconstruct.

The usual starting tool is a Phase I environmental site assessment, a review of current and past uses of the property. EPA's All Appropriate Inquiries page explains that AAI is the process of evaluating a property's environmental conditions and assessing potential liability for contamination, and that its rule recognizes ASTM E1527-21 as a compliant Phase I standard. Note what the rule is built for: it provides liability protections mainly for certain landowners and prospective purchasers. It has timing rules tied to acquiring a property, including updates of certain components within 180 days before acquisition.

A tenant's position is different from a buyer's, and you should not assume a Phase I gives you those protections. Tenants can qualify as bona fide prospective purchasers only on stated conditions. EPA explains that the 2018 BUILD Act revised the definition in CERCLA section 101(40) to include a person who acquires a leasehold interest and meets certain criteria, and that it no longer relies on its 2012 tenant guidance. Under 42 U.S.C. 9601(40), the leasehold must have been acquired after January 11, 2002 and must not be designed to avoid liability. In addition, the owner must be a bona fide prospective purchaser, or the owner must have lost that status through no fault of the tenant while the tenant meets most of the criteria, or the tenant must independently meet the criteria. Ask your attorney how this applies before relying on it.

Depending on the site and your operation, a consultant may recommend sampling beyond the Phase I. Ask the landlord for existing reports too, and read the conclusions and data gaps yourself. If you are leasing a long-used industrial property, or a building with past chemical use, that review is worth paying for even if nothing requires it.

A landlord form often prohibits hazardous materials outright, or forbids them without the landlord's prior written consent. Drench points out that virtually all uses involve hazardous materials to some degree. An outright ban that your operation breaks on its first day is a default waiting to be called, since a California Lawyers Association primer notes a lease may treat a breach of this section as grounds for default.

Replace the ban with something accurate. Drench suggests a carve-out for standard office materials and cleaning supplies in customary amounts, with industrial materials expressly allowed, either as those generally associated with the permitted use or specified by name and quantity on an exhibit. Prepare the list before the negotiation.

• Forklift fuel, batteries and charging equipment.
• Oils, lubricants, coolants and hydraulic fluids.
• Solvents, adhesives, inks, coatings and cleaning chemicals.
• Any regulated product you store for customers, not just materials you use yourself.
• Items kept outdoors, where the spill and stormwater issues may differ.

Then read what the clause requires of you day to day: compliance with laws, spill notice, delivery of government notices, permit copies, record keeping, inspection rights and landlord testing. Ask who pays for a landlord's test that finds nothing.

An indemnity is a promise to cover another party's losses. As a baseline, Drench says an indemnity against liability from a release caused by a party or its agents, employees and contractors is appropriate, whichever side gives it. The problems arise beyond that.

• ✓Is our indemnity limited to releases caused by us or those we are responsible for, and not triggered by the mere presence of materials?
• ✓Are conditions existing before our lease excluded from our obligations, including any contamination migrating from off site?
• ✓Will the landlord indemnify us for pre-existing conditions and its own releases, and how far does that promise reach?
• ✓Does the landlord represent that it has no actual knowledge of hazardous materials in violation of law, subject to any disclosed reports?
• ✓Who cleans up pre-existing contamination if work or a regulator requires it, and do we get rent relief for delay?
• ✓How is personal injury handled in the indemnity, given the difficulty of proving or disproving cause in a claimed illness?
• ✓Does the obligation survive the end of the lease, for how long, and is there a stated process for an exit assessment?
• ✓In a multi-tenant property, are releases by other tenants clearly someone else's problem?

The California Lawyers Association primer notes that these indemnities customarily survive the end of the lease, and it covers tenant requests including representations, remediation of pre-existing conditions and free-rent extensions for delay. It also cautions that its customs are specific to California. Have local counsel confirm what is realistic where your building sits.

An environmental dispute often surfaces at move-out, when the landlord is preparing to re-lease or sell. A baseline helps only if you can compare it to something later and if the lease sets the rules.

1. Keep the baseline report, including site photographs, with your lease file.
2. Maintain records of materials used, permits, manifests, spill responses and inspections.
3. Report and document any spill according to the lease and applicable law, with advice from counsel.
4. Before move-out, remove materials and clean storage areas as the surrender clause requires.
5. If the lease provides for one, or if your attorney recommends it, carry out an exit assessment and compare it against the baseline.

Keep environmental records with your corporate documents, not in a warehouse file box. Claims can surface long after the people who remember the site have moved on.

TAG represents occupiers. We flag environmental questions early in the search and lease negotiation, and we coordinate timing with your consultant and attorney, who are the people qualified to evaluate the site and draft the protection.