Building Better Leases Series – Use: Hazardous Substances & Duty to Inform Lessor

Building Better Leases

Use refers to the purpose for which the Lessee intends to use the space. In this section, the Lessor is not justifying that the Agreed Use is legal, but rather that they are okay with the specific purpose. A potential Lessee has the responsibility of determining whether or not its intended use is legal.

The descriptions for intended use may be generic or specific. This is important because it will affect the Lessee’s ability to sublet the Premises. If the description is very specific, the Lessor can make the argument that only a subtenant with the exact same use will be approved for a sublease. Typically, Lessees will be as generic as possible and Lessors will be as specific as possible.

Hazardous substances are defined as any substance that 1) is potentially injurious to the public or environment, 2) regulated by any governmental agency, and/or 3) creates a liability to the Lessor from third parties or governmental agencies. Some examples of Hazardous Substances include hydrocarbons, petroleum, gasoline, and/or crude oil. Many government agencies such as EPA, AQMD, Water Quality Control Board, and Fire Departments require registration to use Hazardous Substances and monitor them on an ongoing basis. It’s important to ensure that the use, storage, and transportation are also frequently inspected.

Within this section is a term, Reportable Use, which is the Lessee’s use of any of the described substances. The clause prohibits the Lessee from 1) installing above/below ground storage tanks and 2) generating, possessing, using, transporting, or disposing of most Hazardous Substances without the Lessor’s prior consent. Because of the high liability, the Lessor is allowed to increase the Security Deposit as a condition to approving a Reportable Use. Hazardous Substances pose an extremely high level of risk and therefore is often considered a sensitive issue regarding ownership, management, and occupancy of non-residential property. The potential liability related to the presence or suspected presence of Hazardous Substances in and around a property can be shocking. In some cases, the costs associated with Hazardous Substances are more than the property itself. Furthermore, there is the potential for third party liabilities (adjacent/downstream property owners, employees, contractors) not only increases the risk, but can take years to process and fix.

One way to practice safe measures in large lease transactions is for the Lessee to request a Phase I Environmental Assessment prior to occupancy, especially if the Lessee intends on using Hazardous Substances as part of its ongoing operation. In addition, it’s imperative for the Lessor to inspect the Lessee’s operation on a consistent basis and require the highest level of care and responsibility should the Lessee use Hazardous Substances in the Premises.

In the event that a Hazardous Substance ends up located on, under, or about the Premises, it is the Lessee’s responsibility to notify the Lessor immediately. Any documentation that the Lessee has regarding presence of Hazardous Substances should be the same documentation presented to the Lessor. This section emphasizes the fact that the Hazardous Substance does not have to come from the Lessee. For example, if a neighboring property has water contamination and the Lessee is aware of the incident cause by the third party, they are required to notify the Lessor.