Real Property Law
A Primer on the Hazardous Materials Section in Commercial Leases
By: J.J. Sherman, Law Offices of J.J. Sherman, P.C. and Jessie Staley, St. John’s University School of Law
Below are some items to consider when negotiating the “Hazardous Materials” section in a commercial lease on behalf of either the landlord or the tenant.1
What are Hazardous Materials?
Hazardous materials – also referred to in leases and this article as “hazardous substances” – generally include designated substances under federal and state environmental laws and substances that may not be classified under an environmental law but are still considered hazardous, such as petroleum, as well as asbestos and noxious fumes.2
What terms in the Hazardous Materials section of a Commercial Lease are important from a Landlord’s perspective?
The landlord seeks to ensure that the tenant will maintain the leased premises in good order and condition and will not use the leased premises in a way that diminishes the value of the property, affects the landlord’s ability to re-let the leased premises in the future, or violates applicable laws. Accordingly, the landlord is likely to negotiate the following:
No Hazardous Materials on the leased premises. The Hazardous Materials section will contain a covenant that says, more or less, “no hazardous materials may be brought upon, used, kept or stored in or about, or under the leased premises by the tenant, its agents, employees, representatives, licensees, subtenants, contractors or invitees without the prior written consent of the landlord.” A tenant may negotiate to allow a de minimis exception for the tenant to use substances that are necessary for the conduct of the tenant’s business and those commonly used in connection with the leased premises, such as office or cleaning supplies, so long as such substances are used in accordance with applicable law.3
Compliance with laws. If any Hazardous Materials are brought upon, used, kept or stored in, on, about, or under the leased premises by the tenant, then the landlord will require the tenant to do so in a manner that complies with all applicable laws.
Tenant Disclosures. The Hazardous Materials section will contain a covenant requiring the tenant to disclose to the landlord if Hazardous Materials have been or will be released on the leased premises. California Health and Safety Code Section 26142 requires a commercial tenant to disclose the presence of mold to a landlord.4 Additionally, the lease may impose other notifications on the tenant, such as delivering to the landlord any notice from governmental agencies regarding non-compliance with environmental laws.5
Material Breach. The lease often will permit the landlord to call a default and immediately terminate the lease if there’s been a breach by the tenant of any portion of the Hazardous Materials section.
Remediation. The landlord will require the tenant, at the tenant’s expense, to be responsible for fully investigating, cleaning up, and otherwise remediating any spill, release, or discharge of Hazardous Materials caused by the tenant or its agents, employees, representatives, licensees, subtenants, contractors, or invitees.
Indemnity. The Hazardous Materials section will include a specific indemnity where the tenant will agree to indemnify, defend, and hold the landlord harmless from any and all claims resulting from the contamination of the leased premises by Hazardous Materials caused or permitted by the tenant or any of its agents, employees, representatives, licensees, subtenants, contractors or invitees. This indemnity will customarily survive the termination of the lease.6
Landlord Disclosures. If the landlord is aware that Hazardous Materials have been released on the leased premises, the landlord must provide the tenant notice prior to execution of the lease.7 California Health and Safety Code Section 78700 requires a commercial property owner who knows, or should know, that any hazardous substances exist on or beneath the property to give written notice of the condition to the tenant, prior to the lease.8 In addition, a landlord is required by California Health and Safety Code Sections 25915 to 25919.7 to give notice that a building contains or might contain asbestos if the building was constructed before 1979.9 A landlord also is required to give notices regarding the presence of mold under California Health and Safety Code Sections 26140 to 26153.10
What provisions in the Hazardous Materials section of a Commercial Lease are important from a Tenant’s perspective?
While the tenant is ready to take responsibility for its own actions and the actions of its agents during the lease term, the tenant will seek to add language that requires the landlord to take responsibility for any pre-existing Hazardous Materials and for any contamination caused by the landlord or landlord’s agents.
Representation and Warranty. The tenant might ask the landlord to represent and warrant to the tenant that, as of the date of the lease, the landlord has no actual knowledge of the presence of Hazardous Materials, in, on, or under the leased premises or any other part of the project in violation of applicable laws. If there has been prior remediation, a landlord might qualify its warranty, “subject to matters disclosed in environmental reports” and provide copies of existing environmental reports.11
Remediation of pre-existing conditions. In California, the landlord is typically responsible under the lease for cleaning up Hazardous Materials that existed prior to the commencement date to the extent remediation is required under applicable law, at no cost to the tenant.12 Additionally, the tenant will ask the landlord to clean up any releases of Hazardous Materials in violation of applicable law during the lease term that are caused by the landlord or its agents, at no cost to the tenant. These amounts are also specifically excluded from common area maintenance costs passed through to the tenant.13
Indemnity. The tenant will want the landlord to indemnify, defend, and hold the tenant harmless from and against any and all claims, resulting from the presence of Hazardous Materials on, in, under, or about the leased premises or any portion of the project in violation of applicable law, which were in existence prior to the delivery date.14 This indemnity will also customarily survive the termination of the lease.15
Rent abatement for delay in construction. Since the tenant wants to avoid paying rent before it can use the space, the tenant may negotiate a free rent “build-out” period, permitting the tenant to prepare the space for a few months without having to pay rent.16 The tenant may negotiate an extension to this free rent period to cover delays due to the landlord’s remediation of pre-existing Hazardous Materials discovered during the build-out period.
Is the custom in California commercial leases similar to the custom in other states’ commercial leases?
No, it is not! The customs and practices described in this article are specific to California. Consult with local counsel on local customs and practices on the Hazardous Materials section when negotiating a commercial lease in another state.
For more information on this or other commercial real estate law topics, visit the website for Law Offices of J.J. Sherman, P.C.
This communication is for informational purposes only. It is not intended to create an attorney-client relationship or constitute an advertisement, a solicitation, or professional advice as to any particular situation. If this communication is considered advertising, then it is herewith identified as such. This communication does not constitute a guarantee, warranty or prediction regarding the result of representation. Prior results do not guarantee a similar outcome.
1 Special thanks to the Commercial Leasing Committee of the California Lawyers Association for providing information supporting this article.
2 Commercial Leases (CA), Practice Notes, https://plus.lexis.com/api/permalink/6c5c6cd1-7be4-402e-a6d8-bda9b11ff852/?context=1530671 (current as of May 14, 2024). See Cal. Health & Saf. Code § 25547 (Deering 2024.
3 Id. See Exhibit 10.18, Lease between Gateway Jefferson, Inc., Landlord, and Power Great Lakes, Inc., Tenant, SEC.gov, https://www.sec.gov/Archives/edgar/data/1137091/000119312511226865/dex1018.htm (last visited Sept. 12, 2024).
4 Cal. Health & Saf. Code § 26142 (Deering 2024).
5 Commercial Leases (CA), Practice Notes, https://plus.lexis.com/api/permalink/6c5c6cd1-7be4-402e-a6d8-bda9b11ff852/?context=1530671 (current as of May 14, 2024).
6 Id.
7 Id.
8 Cal. Health & Saf. Code § 78700 (Deering 2024).
9 Cal. Health & Saf. Code §§ 25915-25919.7 (Deering 2024).
10 Cal. Health & Saf. Code §§ 26140-26153 (Deering 2024). See Commercial Leases (CA), Practice Notes, https://plus.lexis.com/api/permalink/6c5c6cd1-7be4-402e-a6d8-bda9b11ff852/?context=1530671 (current as of May 14, 2024).
11 Commercial Leases (CA), Practice Notes, https://plus.lexis.com/api/permalink/6c5c6cd1-7be4-402e-a6d8-bda9b11ff852/?context=1530671 (current as of May 14, 2024).
12 Id.
13 Id.
14 See id.
15 Id.
16 See Feature: Small-firm Office Leasing Reality Check: Tips for Negotiating a Lease in a Landlord’s Market, 41 San Francisco Att’y 32, 33 (2015).