Building Better Leases Series – Use: Lessor Termination, Applicable Requirements, & Inspection/Compliance

Building Better Leases

In the event that a “Hazardous Substance Condition” occurs that is not the legal responsibility of the Lessee, then the Lessor has two options. He can investigate and remediate as soon as possible and at his cost or give the Lessee 60 days written notice to terminate the Lease if the cost of investigating and remediating is greater than the amount equal to 12 months Base Rent or $100,000. If the Lessor chooses to terminate the Lease, the Lessee is able to “override” the termination by agreeing to pay the costs in excess of the amounts set forth above. The Lease will continue in full force and effect if the Hazardous Substance Condition is a result of the Lessee’s use and occupancy of the Premises. In addition, the Lessee will be responsible for the cost of investigating and remediating.

Based on the cost of remediation, the Lessee may decide to terminate their Lease. This option is available because sometimes the expenses can be more than the Lessor can afford and other times it’s more than the Premises is worth. Furthermore, the cost to remediate may be less if the portion of the building that is affected can be demolished. If that is the case, the Lessee’s remedy is to agree to pay a portion of the cost in order to maintain its possession of the Premises. Some reasons a Lessee may choose to do this is: cost to move its business, loss of customers/clientele, significant investment in improvements, or the inability to effectively replicate the operation at another location.

The Lessee is required to comply with all the Applicable Requirements regarding ordinances and regulations as well as the recommendations of the Lessor’s engineers and/or consultants. If the Applicable Requirements are adjusted after the Lease commences, the Lessee is still responsible for following them. In the following 10 days after the Lessor writes the Applicable Requirements, the Lessee must provide copies of available documentation evidencing that they agree to the terms. Throughout the Lease, the Lessee should continue to analyze the building and its conditions, notifying the Lessor of any mold or conditions that might lead to mold production.

While the tenant is leasing the Premises, the Lessor has the right to inspect the building in order to verify that the Lessee is complying with the Lease. The Lessor should provide the Lessee with advanced notice if they plan on inspecting the space, however, in the case of an emergency, the Lessor is entitled to immediate access. In addition, the Lessor is responsible for paying for any inspection unless the Lessee is in violation of the lease, then they are the ones responsible for the cost. If the Lessee is using Hazardous Substances in his normal course of business that are regulated by governmental agencies, then the Lessee should provide the Lessor with copies of all MSDS if asked.

Many insurance companies conduct annual inspections of the properties they insure, reinforcing the idea that owners should consistently inspect their own buildings and make sure their tenants are in compliance with the rules set forth.